UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 20-F
☐ REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES
EXCHANGE ACT OF 1934
OR
☒ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the fiscal year ended September 30, 2021
OR
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
OR
☐ SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of event requiring this shell company report
For
the transition period from to
Commission
file number: 001-40231
Universe
Pharmaceuticals INC
(Exact
name of Registrant as specified in its charter)
N/A
(Translation
of Registrant’s name into English)
Cayman
Islands
(Jurisdiction
of incorporation or organization)
265
Jingjiu Avenue, Jinggangshan Economic and Technological Development
Zone
Ji’an,
Jiangxi Province
People’s
Republic of China
+86-571-87555823
(Address
of principal executive offices)
Gang
Lai, Chief Executive Officer
Telephone:
+86-0796-8403309
Email:
gang.lai@universe-pharmacy.com
265
Jingjiu Avenue, Jinggangshan Economic and Technological Development
Zone
Ji’an,
Jiangxi Province
People’s
Republic of China
(Name,
Telephone, E-mail and/or Facsimile number and Address of Company
Contact Person)
Securities
registered or to be registered pursuant to
Section 12(b) of the Act.
|
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
|
Ordinary
Shares |
|
UPC |
|
The
Nasdaq Stock Market |
Securities
registered or to be registered pursuant to
Section 12(g) of the Act.
None
(Title
of Class)
Securities
for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
None
(Title
of Class)
Indicate
the number of outstanding shares of each of the issuer’s classes of
capital or common stock as of the close of the period covered by
the annual report.
An
aggregate of 21,750,000 ordinary shares, par value $0.003125 per
share, as of September 30, 2021.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If
this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934.
Yes ☐
No ☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ☒
No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes ☒
No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or an emerging
growth company. See definition of “large accelerated filer,”
“accelerated filer,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer |
☐ |
|
Accelerated
filer |
☐ |
| Non-accelerated
filer |
☒ |
|
Emerging growth company |
☒ |
If an
emerging growth company that prepares its financial statements in
accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate
by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate
by check mark which basis of accounting the registrant has used to
prepare the financial statements included in this
filing:
|
U.S. GAAP ☒ |
International
Financial Reporting Standards as issued by the
International
Accounting Standards Board ☐
|
Other
☐ |
|
* |
If
“Other” has been checked in response to the previous question,
indicate by check mark which financial statement item the
registrant has elected to follow. Item 17 ☐ Item 18 ☐ |
If
this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ☐ No ☒
Indicate
by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes ☐ No ☐
TABLE
OF CONTENTS
INTRODUCTION
In
this annual report on Form 20-F, unless the context otherwise
requires, references to:
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|
● |
“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 annual report only; |
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|
● |
“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; |
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|
● |
“RMB”
and Renminbi” are to the legal currency of China; |
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● |
“shares”
or “ordinary shares” are to the ordinary shares of the Company, par
value $0.003125 per share; |
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● |
“TCM”
are to traditional Chinese medicine; |
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● |
“TCMD”
are to traditional Chinese medicine derivatives; |
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● |
“Universe
HK” are to Universe INC’s wholly owned subsidiary, Universe
Pharmaceuticals Group (International) Limited, a company
incorporated in Hong Kong; |
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● |
“Universe
Technology” are to Jiangxi Universe Pharmaceuticals Technology Co.,
Ltd., a limited liability company organized under the laws of the
PRC, and is wholly owned by Universe HK; |
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|
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● |
“Universe
Trade” are to Jiangxi Universe Pharmaceuticals Trade Co., Ltd., a
PRC company formed in 2010, a wholly-owned subsidiary of Jiangxi
Universe; |
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● |
“US$,”
“U.S. dollars,” “$” and “dollars” are to the legal currency of the
United States; and |
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● |
“we,”
“us,” “our Company,” or the “Company”, are to one or more of
Universe Pharmaceuticals INC, a company incorporated in the Cayman
Islands and our holding company, and its subsidiaries, as the case
may be. |
This
annual report on Form 20-F includes our audited consolidated
financial statements for the fiscal years ended September 30,
2021, 2020, and 2019. In this annual report, we refer to assets,
obligations, commitments, and liabilities in our consolidated
financial statements in United States dollars. These dollar
references are based on the exchange rate of RMB to United States
dollars, determined as of a specific date or for a specific period.
Changes in the exchange rate will affect the amount of our
obligations and the value of our assets in terms of United States
dollars which may result in an increase or decrease in the amount
of our obligations and the value of our assets.
This
annual report contains translations of certain RMB amounts into
U.S. dollars at specified rates. Unless otherwise stated, the
following exchange rates are used in this annual report:
| |
|
September 30, |
|
| US$ Exchange Rate |
|
2021 |
|
|
2020 |
|
|
2019 |
|
| At
the end of the year - RMB |
|
RMB |
6.4580 to $1.00
|
|
|
RMB |
6.8033 to $1.00 |
|
|
RMB |
7.1378 to $1.00 |
|
| Average rate for
the year - RMB |
|
RMB |
6.5095
to $1.00 |
|
|
RMB |
7.0077
to $1.00 |
|
|
RMB |
6.8729
to $1.00 |
|
Part I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
Not
Applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
Applicable.
ITEM
3. KEY INFORMATION
A.
[Reserved]
B.
Capitalization and
Indebtedness
Not
applicable.
C.
Reasons for the Offer and
Use of Proceeds
Not
applicable.
D.
Risk
Factors
Risks
Related to Our Business and Industry
Price increases in raw materials and sourced products could harm
our 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 increases in such costs through a variety of
ways, while maintaining and improving margins and market share. The
manufacturers of such raw materials 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 prices 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 reliable sources of the raw materials used in the
manufacturing of our products that meet 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, which could in turn adversely
affect our financial results.
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 the PRC is 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.
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.
Many
of the ingredients in our current products have a long history of
human consumption, and although 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 have made substantial investment in advertising our
products in order to improve our brand awareness and our market
position, which efforts may not be successful, and in such event,
our financial position and results of operations may be materially
and negatively affected.
We have made substantial investment in advertising our products in
order to improve our brand awareness and our market position. In
particular, in the fiscal year ended September 30, 2021, we started
to advertise our products through television advertisement. For
example, on September 6, 2021, we entered into a service agreement
with an advertising agency, engaging such agency to develop and
produce a television advertisement for our signature TCMD products,
Bai Nian Dan and Guben Yanlin Pill, and to coordinate with a
television channel to air the advertisement to audience in certain
our target markets, with a term of one year from October 1, 2021 to
September 30, 2022. In connection with this agreement, we prepaid
$7.5 million to the advertising agency. We cannot guarantee that
the advertising agency or the television station will fully fulfill
their obligations under the agreement. If the advertisement was not
produced or aired in the ways agreed upon in the agreement, we may
not be able to get any of the prepaid expenses back. In addition,
we incurred substantial advertising expenditures to maintain and
enhance our brand and our products, which may not prove successful.
Television advertising and other brand promotion activities may not
generate customer awareness or increase revenue, and even if they
do, any increase in revenue may not offset the expenses we incur in
building our brand. Additionally, there could be a negative
reaction to certain advertising campaigns. If we fail to promote
our brand, or if we incur excessive expenses in this effort, we may
fail to attract or retain customers necessary to realize a
sufficient return on our brand-building efforts or to achieve the
desired brand awareness that is critical for our success.
Our future success depends in part on our ability to increase
our production capacity, and we may not able to do so in a
cost-effective manner. We have engaged a third-party sub-contractor
to build manufacturing facilities and an office building for us,
and we may encounter challenges relating to the construction,
management and operation of such facilities.
To the extent we are successful in growing our business, we may
need to increase our production capacity. We entered into a
construction agreement with a sub-contractor, who will construct
four manufacturing plants and an office building for us, with a
total maximum budget of approximately $25.5 million. The
construction started on August 8, 2021 and we expect the
construction of the properties to be complete by August 2023. Our
ability to construct such additional facilities is subject to risks
and uncertainties. The construction of any new facilities will be
subject to risks inherent in the development and construction,
including risks of delays and cost overruns as a result of factors
outside of our control, which may include delays in government
approvals, burdensome permitting conditions, and delays in the
delivery of manufacturing equipment or raw materials required for
the construction. Additionally, we also depend on the third-party
sub-contractor for the development of new facilities, and as such,
we are subject to the risk that such third parties do not fulfill
their obligations to us under the contraction agreement.
If the sub-contractor is unable to deliver the new facilities to us
on time, or if we are unable to expand our manufacturing facilities
in general, we may be unable to further scale our business, which
would negatively affect our results of operations and financial
condition. If we are unable to transition manufacturing operations
to such new facilities in a cost-efficient and timely manner, then
we may experience disruptions in operations, which could negatively
impact our business and financial results. Further, if the demand
for our products decreases or if we do not produce the expected
output after any such new facilities are operational, we may not be
able to spread a significant amount of our fixed costs over the
production volume, thereby increasing our per product fixed cost,
which would have a negative impact on our business, financial
condition and results of operations.
We have internal control deficiency in our internal control
system and deficiencies in our corporate governance. If we fail to
improve our internal control function and corporate governance, we
may be subject to increased risk of fraud or misuse of corporate
assets, which may materially and negatively impact our financial
condition and results of operations.
We have internal control deficiency in our internal control system
and deficiency in our corporate governance. In the fiscal year
ended September 30, 2021, we entered into several material business
transactions, including a construction agreement with a third-party
sub-contractor to construct manufacturing facilities and an office
building for us, a real estate property purchase agreement with a
related party for the purchase of certain real properties, and an
advertising service agreement with a third-party advertising agency
to air our television advertisements. These transactions were not
submitted for approval by our board of directors or any of its
committees. We are initiating plans to improve our internal control
procedures and corporate governance as a public company, and intend
to obtain board approval prior to entering into any future material
business transaction. If we fail to implement remedial measures to
improve our internal control and corporate governance function, we
may be subject to increased risk of fraud or misuse of corporate
assets, which may materially and negatively impact our financial
condition and results of operations.
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 are 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 regulations 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 financial
prospects.
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 “Item 4. Information on the Company—B.
Business Overview—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.
If we fail to maintain or renew requisite licenses, permits,
registrations and filings applicable to our business operations, 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
prospects, 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 to include additional
cities and rural areas in the PRC in an effort to increase our
geographic presence, our distribution, logistics and products may
encounter competition from various 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.
The global spread of COVID-19 pandemic could materially and
adversely affect our business and results of
operations.
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 on February 13, 2020. Our factory has been
fully running as normal since March 2, 2020. Our business
operations has been affected and may continue to be affected by the
ongoing COVID-19 pandemic. Although we resumed our operations
since early March 2020 and the impact of COVID-19 on our operating
results and financial performance for the fiscal years 2020 and
2021 were minimal, any 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 the COVID 19 pandemic may cause our
revenue and cash flows to underperform in the next 12 months from
the date of this annual report. The extent of the future impact of
the COVID-19 pandemic on our business and results of operations is
still uncertain.
The
COVID-19 pandemic continues to have a severe and negative impact on
the Chinese and the global economy. Whether this will lead to a
prolonged downturn in the economy is still unknown. The global
spread of the COVID-19 pandemic in major countries of the world has
and may continue to result in global economic distress, and the
nature of and extent to which it may affect our results of
operations will depend on future developments of the COVID-19
pandemic, which are highly uncertain and difficult to predict. Any
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.
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, the
chairman of our board of directors and our chief executive officer,
for the continued growth and operation of our 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.
We currently do not have “key person” insurance on any of our
executives or employees. There can be no assurance that we will be
able to retain our key personnel after the terms of their
employment expire. The loss of the services of one or more of our
key personnel 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.
Our success depends on our ability to protect our intellectual
property.
We
currently own 22 patents and 99 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 deemed to be valid and enforceable against
third-party infringement or that our products will not infringe any
third-party patent or intellectual property by a court or
administrative body having jurisdiction over such matters. 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, 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 innovations that we expect
to 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 61.6%, 59.8%, and
62.9% of the total value of the products we sold for the fiscal
year ended September 30, 2021, 2020, and 2019, respectively. Our
products are produced in our manufacturing facility located in
Jinggangshan, Jiangxi Province, China. For the fiscal year ended
September 30, 2021, no supplier accounted for more than 10% of our
total purchases. For the fiscal year ended September 30, 2020, two
suppliers accounted for approximately 19.6% and 13.6% of our total
purchases, respectively. For the fiscal year ended September 30,
2019, one supplier accounted for approximately 14.1% of our total
purchases. 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 assurance 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.
In the fiscal year ended September 30, 2021, we incurred $5.47
million of research and development expenses, a 837.3% increase
compared to the expenses in the fiscal year ended September 30,
2020. In order to diversify our profit portfolio, a large portion
of the research and development expenses in the fiscal year ended
September 30, 2021 was spent on developing and testing eight new
products.
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. Furthermore, our research and
development efforts may not produce successful results, and our new
products may not achieve market acceptance, create additional
revenue for us, or bring us profits. Our failure to increase our
net sales sufficient to offset these increased costs would reduce
our profitability and may materially and adversely affect our
business operations and results of operations.
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 could 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,
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 as we continue to grow our
business. 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 any such terminations or those changes in a desirable or
cost-effective manner, which could adversely affect our business
and results of operations.
As of
the date of this annual report, we believe that we are in
substantial compliance with labor-related laws and regulations in
China, and we have not been notified of any instance of
noncompliance. As the interpretation and implementation of
labor-related laws and regulations are still evolving, we cannot
assure you that our employment practice 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.
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, decrease in
available raw materials of sufficient quality and in sufficient
amounts, 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 any of such events was to
result in significant loss of property or other insurable
damage.
Risks
Related to Doing Business in China
The PRC government has significant authority to intervene or
influence the China operations of an offshore holding company, such
as ours, at any time. The PRC government may exert more control
over offerings conducted overseas and/or foreign investment in
China-based issuers. If the PRC government exerts more oversight
and control over offerings that are conducted overseas and/or
foreign investment in China-based issuers and we were to be subject
to such oversight and control, it may result in a material adverse
change to our business operations, significantly limit or
completely hinder our ability to offer or continue to offer
securities to investors, and cause the ordinary shares to
significantly decline in value or become
worthless.
Our
business, prospects, financial condition, and results of operations
may be influenced to a significant degree by political, economic,
and social conditions in China generally. The PRC government has
significant authority to intervene or influence the China
operations of an offshore holding company at any time, which could
result in a material adverse change to our operations and the value
of the ordinary shares. The PRC government has recently indicated
an intent to exert more oversight and control over listings
conducted overseas and/or foreign investment in China-based
issuers. Any such action may hinder our ability to offer or
continue to offer our securities to investors, result in a material
adverse change to our business operations, and damage our
reputation, which could cause the ordinary shares to significantly
decline in value or become worthless. See also “—Failure to comply
with cybersecurity, data privacy, data protection, or any other
laws and regulations related to data may materially and adversely
affect our business, financial condition, and results of
operations.”
Uncertainties arising from the legal system in China, including
uncertainties regarding the interpretation and enforcement of PRC
laws and the possibility that regulations and rules can change
quickly with little advance notice, could hinder our ability to
offer or continue to offer the ordinary shares, result in a
material adverse change to our business operations, and damage our
reputation, which would materially and adversely affect our
financial condition and results of operations and cause the
ordinary shares to significantly decline in value or become
worthless.
The
legal system in China is a civil law system based on written
statutes. Unlike common law systems, it is a system in which
decided legal cases may be cited for reference but have less
precedential value. The laws, regulations, and legal requirements
in China are quickly evolving and their interpretation and
enforcement involve uncertainties. These uncertainties could limit
the legal protections available to you and us. In addition, we
cannot predict the effect of future developments in the PRC legal
system, particularly with regard to new economies, including the
promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, or the preemption of local
regulations by national laws. Furthermore, 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. As a result,
we may not be aware of our potential violation of these policies
and rules. In addition, any administrative and court proceedings in
China may be protracted and result in substantial costs and
diversion of resources and management attention.
New
laws and regulations may be enacted from time to time and
substantial uncertainties exist regarding the interpretation and
implementation of current and any future PRC laws and regulations
applicable to our businesses. In particular, the PRC government
authorities may continue to promulgate new laws, regulations, rules
and guidelines governing companies in the patent medicine industry
with respect to a wide range of issues, such as intellectual
property, unfair competition and antitrust, privacy and data
protection, and other matters. Compliance with these laws,
regulations, rules, guidelines, and implementations may be costly,
and any incompliance or associated inquiries, investigations, and
other governmental actions may divert significant management time
and attention and our financial resources, bring negative
publicity, subject us to liabilities or administrative penalties,
or materially and adversely affect our business, financial
condition, results of operations, and the value of the ordinary
shares.
Our ordinary shares may be delisted or prohibited from being traded
over-the-counter under the Holding Foreign Companies Accountable
Act, if the U.S. Public Company Accounting Oversight Board, or the
PCAOB, is unable to inspect our auditors. The delisting or the
cessation of trading of our ordinary shares, or the threat of their
being delisted or prohibited from being traded, may materially and
adversely affect the value of your investment. Additionally, the
inability of the PCAOB to conduct inspections would deprive our
investors with the benefits of such inspections. Our auditor has
not been inspected by the PCAOB, but according to our auditor, it
will be inspected by the PCAOB on a regular
basis.
The
Holding Foreign Companies Accountable Act, or the HFCA Act, was
enacted on December 18, 2020. The HFCA Act states if the SEC
determines that we have filed audit reports issued by a registered
public accounting firm that has not been subject to inspection by
the PCAOB for three consecutive years, the SEC shall prohibit our
shares from being traded on a national securities exchange or in
the over the counter trading market in the U.S.
Our
auditor, the independent registered public accounting firm that
issues the audit report included elsewhere in this annual report,
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 California
and has not been inspected by the PCAOB, but according to our
auditor, it will be inspected by the PCAOB on a regular
basis.
On
March 24, 2021, the SEC adopted interim final rules relating to the
implementation of certain disclosure and documentation requirements
of the Holding Foreign Companies Accountable Act. We will be
required to comply with these rules if the SEC identifies us as
having a “non-inspection” year under a process to be subsequently
established by the SEC. The SEC is assessing how to implement other
requirements of the Holding Foreign Companies Accountable Act,
including the listing and trading prohibition requirements
described above. In May 2021, the PCAOB issued for public comment a
proposed rule related to the PCAOB’s responsibilities under the
Holding Foreign Companies Accountable Act, which, according to the
PCAOB, would establish a framework for the PCAOB to use when
determining, as contemplated under the Holding Foreign Companies
Accountable Act, whether the PCAOB is unable to inspect or
investigate completely registered public accounting firms located
in a foreign jurisdiction because of a position taken by one or
more authorities in that jurisdiction. The proposed rule was
adopted by the PCAOB in September 2021, pending the final approval
of the SEC to become effective.
On
June 22, 2021, the U.S. Senate passed the Accelerating Holding
Foreign Companies Accountable Act, which, if passed by the U.S.
House of Representatives and signed into law, would reduce the
number of consecutive non-inspection years required for triggering
the prohibitions under the Holding Foreign Companies Accountable
Act from three years to two.
On
December 2, 2021, the SEC issued amendments to finalize rules
implementing the submission and disclosure requirements in the
Holding Foreign Companies Accountable Act. The rules apply to
registrants that the SEC identifies as having filed an annual
report with an audit report issued by a registered public
accounting firm that is located in a foreign jurisdiction and that
PCAOB is unable to inspect or investigate completely because of a
position taken by an authority in foreign jurisdictions.
On December 16, 2021, the PCAOB issued a report on its
determination that it is unable to inspect or investigate
completely PCAOB-registered public accounting firms headquartered
in China and in Hong Kong because of positions taken by PRC and
Hong Kong authorities in those jurisdictions. The PCAOB has made
such determination as mandated under the Holding Foreign Companies
Accountable Act. Pursuant to each annual determination by the
PCAOB, the SEC will, on an annual basis, identify issuers that have
used non-inspected audit firms and thus are at risk of such
suspensions in the future. Our auditor is headquartered in
California and is not subject to this determination announced by
the PCAOB.
The
SEC may propose additional rules or guidance that could impact us
if our auditor is not subject to PCAOB inspection. For example, on
August 6, 2020, the President’s Working Group on Financial Markets,
or the PWG, issued the Report on Protecting United States Investors
from Significant Risks from Chinese Companies to the then President
of the United States. This report recommended that the SEC
implement five measures to address companies from jurisdictions
that do not provide the PCAOB with sufficient access to fulfil its
statutory mandate. Some of the concepts of these recommendations
were implemented with the enactment of the Holding Foreign
Companies Accountable Act. However, some of the recommendations
were more stringent than the Holding Foreign Companies Accountable
Act. For example, if a company was not subject to PCAOB inspection,
the report recommended that the transition period before a company
would be delisted would end on January 1, 2022.
The
SEC has announced that the SEC staff is preparing a consolidated
proposal for the rules regarding the implementation of the Holding
Foreign Companies Accountable Act and to address the
recommendations in the PWG report. It is unclear when the SEC will
complete its rulemaking and when such rules will become effective
and what, if any, of the PWG recommendations will be adopted. The
SEC has also announced amendments to various annual report forms to
accommodate the certification and disclosure requirements of the
Holding Foreign Companies Accountable Act. There could be
additional regulatory or legislative requirements or guidance that
could impact us if our auditor is not subject to PCAOB inspection.
The implications of this possible regulation or guidance, in
addition to the requirements of the Holding Foreign Companies
Accountable Act, are uncertain.
If,
for whatever reason, the PCAOB is unable to conduct full
inspections of our auditor, uncertainty under the HFCA Act could
cause the market price of our ordinary shares to be materially and
adversely affected, and our securities could be delisted or
prohibited from being traded “over-the-counter”. The risk and
uncertainty associated with a potential delisting would have a
negative impact on the price of our ordinary shares.
The
foregoing recent developments would add uncertainties to our future
offerings and may result in prohibitions on the trading of our
ordinary shares on the Nasdaq Stock Market, if our auditors fail to
meet the PCAOB inspection requirement in time.
Failure to comply with cybersecurity, data privacy, data
protection, or any other laws and regulations related to data may
materially and adversely affect our business, financial condition,
and results of operations.
We
may be subject to a variety of cybersecurity, data privacy, data
protection, and other laws and regulations related to data,
including those relating to the collection, use, sharing,
retention, security, disclosure, and transfer of confidential and
private information, such as personal information and other data.
These laws and regulations apply not only to third-party
transactions, but also to transfers of information within our
organization. These laws and regulations may restrict our business
activities and require us to incur increased costs and efforts to
comply, and any breach or noncompliance may subject us to
proceedings against us, damage our reputation, or result in
penalties and other significant legal liabilities, and thus may
materially and adversely affect our business, financial condition,
and results of operations.
In
China, the cybersecurity, data privacy, data protection, or other
data-related laws and regulations are relatively new and evolving,
and their interpretation and application may be uncertain. For
example, on November 14, 2021, the Administration Regulations on
Cyber Data Security (Draft for Comments) (the “Draft Regulation”)
was proposed by the Cyberspace Administration of China, or the CAC,
for public comments until December 13, 2021. The Draft Regulation
reiterates that data processors which process the personal
information of at least one million users must apply for a
cybersecurity review if they plan on listing its securities
overseas, and the Draft Regulation further requires the data
processors to apply for cybersecurity review in accordance with
relevant laws and regulations under the following circumstances:
(i) such data processor engages in merger, reorganization or
division of internet platform operators that have gathered a large
number of data resources related to national security, economic
development and public interests affects or may affect national
security; (ii) the listing of such data processor overseas affects
or may affect national security; and (iii) such data processor
engages in other data processing activities that affect or may
affect national security. Any failure to comply with such
requirements may subject us to, among others, suspension of
services, fines, revocation of relevant business permits or
business licenses, and/or penalties. Since the CAC is still seeking
comments on the Draft Regulation from the public as of the date of
this annual report, the Draft Regulation (especially its operative
provisions) and its anticipated adoption or effective date are
subject to further changes with substantial uncertainty.
As of
the date of this annual report, we have not engaged in the relevant
businesses provided in the Draft Regulation. As such, we currently
do not expect the draft measures by the CAC or other recent
regulations will have an impact on our business or results of
operations, and we believe that we are compliant with the
regulations and policies that have been issued by the CAC to date.
As of the date of this annual report, we have not received any
investigation, notice, warning, or sanction from applicable
government authorities (including the CAC) with regard to our
business operations concerning any issues related to cybersecurity
and data security. In addition, we have not been involved in any
review, investigation, enquiry, penalty, or other legal proceedings
initiated by applicable governmental or regulatory authorities or
third parties in relation to in relation to cyber security or data
protection. However, we still face uncertainties regarding the
interpretation and implementation of these laws and regulations in
the future. Cybersecurity review could result in disruption in our
operations, negative publicity with respect to our Company, and
diversion of our managerial and financial resources. Furthermore,
if we were found to be in violation of applicable laws and
regulations in China during such review, we could be subject to
fines or other government sanctions and reputational damage.
Therefore, potential cybersecurity review, if applicable to us,
could materially and adversely affect our business, financial
condition, and results of operations.
In
addition, the PRC Data Security Law, which was promulgated by the
Standing Committee of the National People’s Congress (the “SCNPC”)
on June 10, 2021 and took effect on September 1, 2021, requires
data collection to be conducted in a legitimate and proper manner,
and stipulates that, for the purpose of data protection, data
processing activities must be conducted based on data
classification and hierarchical protection system for data
security. Furthermore, the recently issued Opinions on Strictly
Cracking Down Illegal Securities Activities require (i) speeding up
the revision of the provisions on strengthening the confidentiality
and archives management relating to overseas issuance and listing
of securities and (ii) improving the laws and regulations relating
to data security, cross-border data flow, and management of
confidential information. The PRC Personal Information Protection
Law, which was promulgated by the SCNPC on August 20, 2021 and took
effect on November 1, 2021, integrates the scattered rules with
respect to personal information rights and privacy protection and
applies to the processing of personal information within China as
well as certain personal information processing activities outside
China, including those for the provision of products and services
to natural persons within China or for the analysis and assessment
of acts of natural persons within China. There remain uncertainties
regarding the further interpretation and implementation of those
laws and regulations, if they are deemed to be applicable to us, we
cannot assure you that we will be compliant with such new
regulations in all respects, and we may be ordered to rectify and
terminate any actions that are deemed illegal by the government
authorities and become subject to fines and other government
sanctions, which may materially and adversely affect our business,
financial condition, and results of operations.
The approval and/or other requirements of the China Securities
Regulatory Commission, or the CSRC, or other PRC governmental
authorities may be required in connection with an offering under
PRC rules, regulations or policies, and, if required, we cannot
predict whether or how soon we will be able to obtain such
approval.
The
Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors, or the M&A Rules, purport to require
offshore special purpose vehicles that are controlled by PRC
companies or individuals and that have been formed for the purpose
of seeking a public listing on an overseas stock exchange through
acquisitions of PRC domestic companies or assets to obtain CSRC
approval prior to publicly listing their securities on an overseas
stock exchange. The interpretation and application of the
regulations remain unclear. If a governmental approval is required,
it is uncertain how long it will take for us to obtain such
approval, and, even if we obtain such approval, the approval could
be rescinded. Any failure or delay in obtaining the requisite
governmental approval for an offering, or a rescission of such CSRC
approval, if obtained by us, may subject us to sanctions imposed by
the relevant PRC regulatory authority, which could include fines
and penalties on our operations in China, restrictions or
limitations on our ability to pay dividends outside of China, and
other forms of sanctions that may materially and adversely affect
our business, financial condition, and results of
operations.
Our
PRC counsel has advised us that, based on its understanding of the
current PRC laws and regulations, we will not be required to submit
an application to the CSRC for the approval under the M&A Rules
for an offering because (i) the CSRC currently has not issued any
definitive rule or interpretation concerning whether offerings like
ours are subject to this regulation; and (ii) we did not acquire
any equity interests or assets of a “PRC domestic company” as such
terms are defined under the M&A Rules.
However,
our PRC counsel has further advised us that there remains some
uncertainty as to how the M&A Rules will be interpreted or
implemented in the context of an overseas offering, and its
opinions summarized above are subject to any new laws, rules and
regulations or detailed implementations and interpretations in any
form relating to the M&A Rules. We cannot assure you that
relevant PRC governmental authorities, including the CSRC, would
reach the same conclusion as our PRC counsel, and hence, we may
face regulatory actions or other sanctions from them. Furthermore,
relevant PRC governmental authorities promulgated the Opinions on
Strictly Cracking Down Illegal Securities Activities, which
provided that the administration and supervision of overseas-listed
China-based companies will be strengthened, and the special
provisions of the State Council on overseas issuance and listing of
shares by such companies will be revised, clarifying the
responsibilities of domestic industry competent authorities and
regulatory authorities. However, the Opinions on Strictly Cracking
Down Illegal Securities Activities were only issued recently,
leaving uncertainties regarding the interpretation and
implementation of these opinions. It is possible that any new rules
or regulations may impose additional requirements on us. In
addition, on July 10, 2021 and November 14, 2021, the CAC issued a
revised draft of the Measures for Cybersecurity Review and a draft
of the Regulations on the Network Data Security, respectively, for
public comments, according to which, among others, operators of
“critical information infrastructure” or data processors holding
over one million users’ personal information shall apply to the
Cybersecurity Review Office for a cybersecurity review before any
listing on a foreign stock exchange. It is uncertain when the final
measures will be issued and take effect, how they will be enacted,
interpreted or implemented, and whether they will affect us. If it
is determined in the future that CSRC approval or other procedural
requirements are required to be met for and prior to an offering,
it is uncertain whether we can or how long it will take us to
obtain such approval or complete such procedures and any such
approval could be rescinded. Any failure to obtain or delay in
obtaining such approval or completing such procedures for an
offering, or a rescission of any such approval, could subject us to
sanctions by the relevant PRC governmental authorities. The
governmental authorities may impose restrictions and penalties on
our operations in China, such as the suspension of our apps and
services, revocation of our licenses, shutting down part or all of
our operations, limiting our ability to pay dividends outside of
China, delaying or restricting the repatriation of the proceeds
from an offering into China, or may take other actions that could
have a material adverse effect on our business, financial
condition, results of operations and prospects, as well as the
trading price of the ordinary shares. The PRC governmental
authorities may also take actions requiring us, or making it
advisable for us, to halt an offering before settlement and
delivery of the ordinary shares offered hereby. Consequently, if
you engage in market trading or other activities in anticipation of
and prior to settlement and delivery, you do so at the risk that
settlement and delivery may not occur. In addition, if the PRC
governmental authorities later promulgate new rules or requirements
that we obtain their approvals for filings, registrations or other
kinds of authorizations for an offering, we cannot assure you that
we can obtain the approval, authorizations, or complete required
procedures or other requirements in a timely manner, or at all, or
obtain a waiver of the requisite requirements if and when
procedures are established to obtain such a waiver.
PRC regulation of loans to, and direct investments in, PRC entities
by offshore holding companies may delay or prevent us from using
proceeds from our offerings and/or other 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 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.
We must remit proceeds of any future offerings 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 our future offerings 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 an offering. 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 our offerings, we must take the following
steps:
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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. |
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Second,
we will remit the offering proceeds into this special foreign
exchange account. |
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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 any
future offerings 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 our future
offerings 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.
Changes to the PRC legal system could have an adverse effect on
us.
The
PRC legal system is a civil law system based on written statutes.
Unlike the common law system, prior court decisions under the civil
law system may be cited for reference but have limited precedential
value. Since these laws and regulations are relatively new and the
PRC legal system continues to rapidly evolve, the interpretations
of many laws, regulations and rules are not always uniform and the
enforcement of these laws, regulations and rules involves
uncertainties.
In
1979, the PRC government began to promulgate a comprehensive system
of laws and regulations governing economic matters in general. The
overall effect of legislation over the past decades has
significantly enhanced the protections afforded to various forms of
foreign investments in China. However, recently enacted laws and
regulations may not sufficiently cover all aspects of economic
activities in China. In particular, the interpretation
and enforcement of these laws and regulations involve
uncertainties. Since PRC administrative and court authorities have
significant discretion in interpreting and implementing
statutory provisions and contractual terms, it may be difficult to
evaluate the outcome of administrative and court proceedings and
the level of legal protection we enjoy. These uncertainties may
affect our judgment on the relevance of legal requirements and our
ability to enforce our contractual rights or tort
claims.
Furthermore,
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 and may have retroactive effect. As a result, we may not
be aware of our violation of any of these policies and rules until
sometime after the violation. In addition, any administrative and
court proceedings in China may be protracted, resulting in
substantial costs and diversion of resources and management
attention.
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. As of
the date of this annual report, we believe that we are in
substantial compliance with labor-related laws and regulations in
China, and we have not been notified of any instance of
noncompliance. We cannot assure you that we 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 taxpayer 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 (the “SAT”)
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 annual report, 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.
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 to be 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.
We
are 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
expose us to claims of 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 that, as of the date of this annual report on Form 20-F,
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 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, and could affect our results of operations and
financial conditions.
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
U.S. 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 U.S. dollars affect the value of
our assets and the results of our operations in U.S. dollars. The
value of the RMB against the U.S. 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 securities
will be offered in United States dollars, and we will need to
convert any 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.
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, we are 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 may
be 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.
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 (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 (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.
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
Ministry of Commerce of the People’s Republic of China, or MOFCOM,
the State Assets Supervision and Administration Commission, the
SAT, the SAIC, the CSRC and the SAFE, jointly issued 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.
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 (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 (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 our Ordinary Shares
Our share price may be volatile and could decline
substantially.
The
market price of our ordinary shares may be volatile, both because
of actual and perceived changes in the company’s financial results
and prospects, and because of general volatility in the stock
market. The factors that could cause fluctuations in our share
price may include, among other factors discussed in this section,
the following:
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actual
or anticipated variations in the financial results and prospects of
the company or other companies in the pharmaceutical
business; |
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changes
in financial estimates by research analysts; |
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changes
in the market valuations of other education technology
companies; |
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announcements
by us or our competitors of new education services, expansions,
investments, acquisitions, strategic partnerships or joint
ventures; |
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mergers
or other business combinations involving us; |
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additions
and departures of key personnel and senior management; |
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changes
in accounting principles; |
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the
passage of legislation or other developments affecting us or our
industry; |
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the
trading volume of our ordinary shares in the public
market; |
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the
release of lockup, escrow or other transfer restrictions on our
outstanding equity securities or sales of additional equity
securities; |
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potential
litigation or regulatory investigations; |
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changes
in economic conditions, including fluctuations in global and
Chinese economies; |
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financial
market conditions; |
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natural
disasters, terrorist acts, acts of war or periods of civil unrest;
and |
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the
realization of some or all of the risks described in this
section. |
In
addition, the stock markets have experienced significant price and
trading volume fluctuations from time to time, and the market
prices of the equity securities of pharmaceutical companies are
sometimes subject to sharp price and trading volume changes. These
broad market fluctuations may materially and adversely affect the
market price of our ordinary shares.
We may issue additional ordinary shares or other equity securities
without your approval, which would dilute your ownership interests
and may depress the market price of our ordinary
shares.
We
may issue additional ordinary shares or our other securities to
investors. We may also issue additional ordinary shares or other
equity securities of equal or senior rank in the future for any
reason or in connection with, among other things, future
acquisitions or repayment of outstanding indebtedness, without
shareholder approval, in a number of circumstances.
Our
issuance of additional ordinary shares or other equity securities
of equal or senior rank would have the following
effects:
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our
existing shareholders’ proportionate ownership interest in us will
decrease; |
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the
amount of cash available per share, including for payment of
dividends in the future, may decrease; |
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the
relative voting strength of each previously outstanding share may
be diminished; and |
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the
market price of our ordinary shares may decline. |
We currently do not expect to pay dividends on our ordinary shares
in the foreseeable future.
We
currently do not expect to pay dividends on our ordinary shares in
the foreseeable future. Instead, for the foreseeable future, it is
expected that we will continue to retain any earnings to finance
the development and expansion of its business, and not to pay any
cash dividends on its ordinary shares. Consequently, you should not
rely on an investment in the Company as a source for any future
dividend income.
Our
board of directors has complete discretion as to whether to
distribute dividends, subject to applicable laws. Even if our board
of directors decides to declare and pay dividends, the timing,
amount and form of future dividends, if any, will depend on, among
other things, our future results of operations and cash flow, our
capital requirements and surplus, the amount of distributions, if
any, received by us from our subsidiaries, our financial condition,
contractual restrictions and other factors deemed relevant by our
board of directors. Accordingly, the return on your investment in
our ordinary shares will likely depend entirely upon any future
price appreciation of our ordinary shares. We cannot guarantee that
our ordinary shares will appreciate in value or even maintain the
price at which you purchased the ordinary shares. You may not
realize a return on your investment in our ordinary shares and you
may even lose your entire investment in our ordinary
shares.
If securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about us or our
business, our ordinary share price and trading volume could
decline.
The
trading market for our ordinary shares will depend in part on the
research and reports that securities or industry analysts publish
about us or our business. Securities and industry analysts do not
currently, and may never, publish research on us If no securities
or industry analysts commence coverage of our Company, the trading
price for its ordinary shares would likely be negatively impacted.
In the event securities or industry analysts initiate coverage, if
one or more of the analysts who cover us downgrade its securities
or publish inaccurate or unfavorable research about its business,
its stock price would likely decline. If one or more of these
analysts cease coverage of our Company or fail to publish reports
on our Company, demand for its ordinary shares could decrease,
which might cause its ordinary share price and trading volume to
decline.
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. 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:
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the
requirement that our director nominees must be selected or
recommended solely by independent directors; and |
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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 incur substantial increased costs being a public
company.
We
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.
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 our initial public 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 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, 2022 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
“Item 10. Additional Information—E.
Taxation—United States Federal Income
Taxation—PFIC.”
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, 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 Public Company Accounting Oversight Board, or 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.
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
year ended September 30, 2021, we identified material weaknesses in
our internal control over financial reporting and other control
deficiencies as of September 30, 2021. A “material weakness” is a
deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected on a
timely basis.
The
material weakness identified to date relate to a lack of proper
internal audit function.
Following
the identification of the material weaknesses and control
deficiencies, we have undertaken certain remedial steps and plan to
continue taking remedial measures, including (i) hiring qualified
personnel to set up an internal audit function; (ii) establishing
an annual plan of internal audit and getting approval from the
audit committee; and (iii) engaging an external consulting firm to
assist us in conducting internal audit programs, if
necessary.
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.
As a
public company, we will be subject to Sarbanes-Oxley Act of 2002,
or Sarbanes-Oxley Act. Since we qualify as an “emerging growth
company” pursuant to the JOBS Act with less than
US$1.07 billion in revenue for our last fiscal year. 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 of
the Sarbanes-Oxley Act of 2002, or Section 404, in the
assessment of the emerging growth company’s internal control over
financial reporting. Moreover, even if 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.
During
the course of documenting and testing our internal control
procedures, we may identify other weaknesses and deficiencies in
its 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 securities. Additionally,
ineffective internal control over financial reporting could expose
us to increased risk of fraud or misuse of corporate assets and
subject us to potential delisting from the stock exchange on which
we list, regulatory investigations and civil or criminal
sanctions.
As a foreign private issuer, we are not subject to certain U.S.
securities law disclosure requirements that apply to a domestic
U.S. issuer, which may limit the information publicly available to
our shareholders.
As a
foreign private issuer we are not required to comply with all of
the periodic disclosure and current reporting requirements of the
Exchange Act and therefore there may be less publicly available
information about us than if we were a U.S. domestic issuer. 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:
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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; |
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the
sections of the Exchange Act regulating the solicitation of
proxies, consents, or authorizations in respect of a security
registered under the Exchange Act; |
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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. 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.
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 SEC 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.
Item
4. INFORMATION ON THE COMPANY
A.
History and Development of
the Company
We
are a Cayman Islands holding company and not a PRC operating
company. As a holding company with no material operations of our
own, our operations are conducted in China by our PRC
subsidiaries. We directly hold 100% equity interests in our
subsidiaries, and we do not currently use a variable interest
entity (“VIE”) structure.
We
face legal and operational risks associated with having the
majority of our operations in China. The Chinese government has
significant authority to exert influence on the ability of a
China-based company, such as us, to conduct its business.
Therefore, investors of our company and our business face potential
uncertainty from the PRC government. Changes in China’s economic,
political or social conditions or government policies could
materially adversely affect our business and results of operations.
These risks could result in a material change in our operations
and/or the value of our ordinary shares or could significantly
limit or completely hinder our ability to offer or continue to
offer securities to investors and cause the value of such
securities to significantly decline or be worthless. In particular,
recent statements and regulatory actions by China’s government,
such as those related to the use of variable interest entities and
data security or anti-monopoly concerns, as well as the PCAOB’s
ability to inspect our auditors, may impact our Company’s ability
to conduct our business, accept foreign investments, or be listed
on a U.S. or other foreign stock exchange. See “Item 3. Key
Information — D. Risk Factors — Risks Related to Doing Business in
China — The PRC government has significant authority to intervene
or influence the China operations of an offshore holding company,
such as ours, at any time. The PRC government may exert more
control over offerings conducted overseas and/or foreign investment
in China-based issuers. If the PRC government exerts more oversight
and control over offerings that are conducted overseas and/or
foreign investment in China-based issuers and we were to be subject
to such oversight and control, it may result in a material adverse
change to our business operations, significantly limit or
completely hinder our ability to offer or continue to offer
securities to investors, and cause the ordinary shares to
significantly decline in value or become worthless” and “Item 3.
Key Information — D. Risk Factors — Risks Related to Doing Business
in China — Uncertainties arising from the legal system in China,
including uncertainties regarding the interpretation and
enforcement of PRC laws and the possibility that regulations and
rules can change quickly with little advance notice, could hinder
our ability to offer or continue to offer the ordinary shares,
result in a material adverse change to our business operations, and
damage our reputation, which would materially and adversely affect
our financial condition and results of operations and cause the
ordinary shares to significantly decline in value or become
worthless.”
We
believe that we and our subsidiaries have obtained all material
licenses and approvals necessary to operate in China and are not
required to obtain approval from any PRC government authorities,
including the CSRC or the CAC, or any other government entity, to
issue our ordinary shares to foreign investors. Since the recent
regulatory actions are new, however, it is highly uncertain how
soon legislative or administrative regulation making bodies will
respond and what existing or new laws or regulations or detailed
implementations and interpretations will be modified or
promulgated, if any, and the potential impact such modified or new
laws and regulations will have on our daily business operation,
ability to accept foreign investments, and listing on the Nasdaq
Stock Market. If we do not receive or maintain the approvals, or we
inadvertently conclude that such approvals are not required, or
applicable laws, regulations, or interpretations change such that
we are required to obtain approval in the future, we may be subject
to an investigation by competent regulators, fines or penalties,
ordered to suspend our relevant business and rectify, prohibited
from engaging in relevant business, or subject to an order
prohibiting us from conducting an offering, and these risks could
result in a material adverse change in our operations,
significantly limit or completely hinder our ability to continue to
offer securities to investors, or cause such securities to
significantly decline in value or become worthless. See “Item 3.
Key Information—Risk Factors—Risks Relating to Doing Business in
China—Failure to comply with cybersecurity, data privacy, data
protection, or any other laws and regulations related to data may
materially and adversely affect our business, financial condition,
and results of operations.”
In addition, trading in our securities may be prohibited under the
HFCA Act if the PCAOB determines that it cannot inspect the
workpapers prepared by our auditor, and that as a result an
exchange may determine to delist our securities. On June 22, 2021,
the U.S. Senate passed the Accelerating Holding Foreign Companies
Accountable Act, which, if passed by the U.S. House of
Representatives and signed into law, would reduce the period of
time for foreign companies to comply with PCAOB audits to two
consecutive years instead of three, thus reducing the time period
for triggering the prohibition on trading. On December 16, 2021,
the PCAOB issued a report on its determination that it is unable to
inspect or investigate completely PCAOB-registered public
accounting firms headquartered in China and in Hong Kong because of
positions taken by PRC and Hong Kong authorities in those
jurisdictions. Our auditor, the independent registered public
accounting firm that issues the audit report included elsewhere in
this annual report, as an auditor of companies that are traded
publicly in the U.S. and a firm registered with the PCAOB, is
subject to laws in the U.S., pursuant to which the PCAOB conducts
regular inspections to assess its compliance with the applicable
professional standards. Our auditor is headquartered in California
and has not been inspected by the PCAOB, but according to our
auditor, it will be inspected by the PCAOB on a regular basis. Our
auditor is not subject to the determination issued by the PCAOB on
December 16, 2021. See “Item 3. Key Information — D. Risk Factors
— Risks Related to Doing Business in China — Our ordinary
shares may be delisted or prohibited from being traded
over-the-counter under the Holding Foreign Companies Accountable
Act, if the U.S. Public Company Accounting Oversight Board, or the
PCAOB, is unable to inspect our auditors. The delisting or the
cessation of trading of our ordinary shares, or the threat of their
being delisted or prohibited from being traded, may materially and
adversely affect the value of your investment. Additionally, the
inability of the PCAOB to conduct inspections would deprive our
investors with the benefits of such inspections. Our auditor has
not been inspected by the PCAOB, but according to our auditor, it
will be inspected by the PCAOB on a regular basis.”
Cash
flows have occurred between our Cayman Islands holding company and
our subsidiaries. Our Cayman Islands holding company had not
received cash transfers from its subsidiaries for the years ended
September 30, 2019, 2020 and 2021. There was no distribution of
earnings by our PRC subsidiaries to our Cayman Islands holding
company during the years ended September 30, 2021, 2020 and 2019.
For the fiscal year ended September 30, 2021, our Cayman Islands
holding company, via Universe HK and Universe Technology,
transferred cash in the amount of $6,807,507 to our PRC operating
subsidiaries to be used for general corporate purposes. For the
years ended September 30, 2020 and 2019, there was no cash
transferred from our Cayman Islands holding company to its PRC
subsidiaries.
Our
Cayman Islands holding company has not declared or paid dividends
in the past, nor any dividends or distributions were made by a
subsidiary to the Cayman Islands holding company. Our board of
directors has complete discretion on whether to distribute
dividends, subject to applicable laws. We do not have any current
plan to declare or pay any cash dividends on our ordinary shares in
the foreseeable future. See “Item 3. Key Information — D. Risk
Factors — Risks Related to Our Ordinary Shares—We currently do not
expect to pay dividends on our ordinary shares in the foreseeable
future.” Subject to certain contractual, legal and regulatory
restrictions, cash and capital contributions may be transferred
among our Cayman Islands holding company and our subsidiaries. If
needed, our Cayman Islands holding company can transfer cash to our
PRC subsidiaries through loans and/or capital contributions, and
our PRC subsidiaries can transfer cash to our Cayman Islands
holding company through issuing dividends or other distributions.
Cash transfers from our Cayman Islands holding company are subject
to applicable PRC laws and regulations on loans and direct
investment. For details, see “Item 3. Key Information — D. Risk
Factors — 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
our offerings and/or other financing activities to make loans or
additional capital contributions to our PRC operating
subsidiaries.” In addition, current PRC regulations permit our PRC
subsidiaries to pay dividends to their respective shareholders only
out of their accumulated profits, if any, determined in accordance
with PRC accounting standards and regulations. For details, see
“Item 3. Key Information — D. Risk Factors — Risks Related to Doing
Business in China — 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.”
Our
Corporate History and Structure
We
initially conducted our business through Jiangxi Universe, a PRC
company formed in 1998 and 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, was incorporated under the
laws of the Cayman Islands as an exempted company with limited
liability. Our wholly owned subsidiary 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 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.
Our
holding company has 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.
The
following diagram illustrates our corporate structure as of the
date of this annual report:
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, and 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. We maintain a corporate website at
http://www.universe-pharmacy.com. The information contained in, or
accessible from, our website or any other website does not
constitute a part of this annual report. 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.
The
SEC maintains a website at www.sec.gov that contains reports,
proxy, and information statements, and other information regarding
issuers that file electronically with the SEC using its EDGAR
system.
For
information regarding our principal capital expenditures, see “Item
5. Operating and Financial Review and Prospects—B. Liquidity and
Capital Resources—Capital Expenditures.”
B.
Business
Overview
Overview
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 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 202 cities of 30
provinces in China. In addition, through our subsidiary 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. For the year ended
September 30, 2021, we distributed around 2,766 types of
third-party products.
Our Customers. Our
major customers are pharmaceutical distributors, 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 decreased from a total of 2,603 customers as of September 30,
2019 decreased to 2,209 as of September 30, 2020 due to the impact
of the COVID-19 pandemic. In fiscal year 2021, our business
operations gradually recovered from the negative impact of COVID-19
and our customer base increased to 2,708 as of September 30, 2021.
Our revenues from selling our own products 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 due to the
impact of COVID-19 pandemic and strong market competition, and
increased to $29,559,286 for the fiscal year ended September 30,
2021. Our revenues from distributing and selling products
manufactured by third-party companies slightly decreased from
$12,333,774 for the fiscal year ended September 30, 2019 to
$12,329,209 for the year ended September 30, 2020, and increased to
$18,422,745 for the fiscal year ended September 30, 2021. Our net
income was $7,551,465 for the fiscal year ended September 30, 2019,
$7,558,222 for the fiscal year ended September 30, 2020, and
$11,319,952 for the fiscal year ended September 30,
2021.
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)” 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. 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 over time. 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 about 30
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. Mr. Baochang Liu, our chief
operating officer, has over 17 years of experience in
pharmaceutical marketing and had previously held marketing and
management positions at a number of listed pharmaceutical companies
in China. 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 from sales of TCMD
products 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. We gradually recovered from the negative impact
of the COVID-19 impact on our business operations. Our revenue for
the fiscal year ended September 30, 2021 increased from $30,703,960
for the fiscal year ended September 30, 2020 to $47,982,031 for the
fiscal year ended September 30, 2021, and our net income increased
from $7,558,222 for the fiscal year ended September 30, 2020 to
$11,319,952 for the fiscal year ended September 30,
2021.
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. In the fiscal year ended
September 30, 2021, we started to advertise our products through
television advertisement. We also intend to advertise targeting at
older customers, including transmitting our advertisements through
additional traditional media platforms such as 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
Currently,
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
The size of the Chinese patent medicine market has 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.
Our
Manufactured Products
We manufacture, market and sell 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 |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
Intended Uses |
|
Chronic Condition
Treatments |
|
Guben Yanling Pill |
|
Pills |
|
|
40.3 |
% |
|
|
38.2 |
% |
|
|
32.4 |
% |
|
To relieve fatigue, palpitation, low
back pain, and generalized weakness and soreness. |
| |
|
Shenrong Weisheng Pill |
|
Pills |
|
|
4.7 |
% |
|
|
4.6 |
% |
|
|
5.3 |
% |
|
To relieve fatigue, dizziness, excessive
sweating, and pain in the waist and the knees. |
| |
|
Quanlu Pill |
|
Pills |
|
|
1.5 |
% |
|
|
0.8 |
% |
|
|
0.4 |
% |
|
To improve kidney functions and spleen functions,
and relieve fatigue, low back pain, and knee pain. |
| |
|
Wuzi Yanzong Oral Liquid |
|
Oral liquid |
|
|
0.4 |
% |
|
|
0.6 |
% |
|
|
0.7 |
% |
|
To improve kidney functions. |
| |
|
Yangxue Danggui Syrup |
|
Syrup |
|
|
0.9 |
% |
|
|
1.6 |
% |
|
|
3.5 |
% |
|
To improve blood circulation and treating
dizziness, headaches and menstrual pains. |
| |
|
Fengshitong Medicinal Liquor |
|
Medicinal liquor |
|
|
1.1 |
% |
|
|
1.6 |
% |
|
|
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 |
|
|
1.3 |
% |
|
|
1.8 |
% |
|
|
1.9 |
% |
|
To treat dizziness, palpitation, fatigue, and
weakness, and ease menstrual flow. |
| |
|
Fengtong Medicinal Liquor |
|
Medicinal liquor |
|
|
0.3 |
% |
|
|
0.2 |
% |
|
|
2.9 |
% |
|
To treat low back pain and numbness in the feet
and hands, and relieve symptoms of arthritis. |
| |
|
Shenrong Medicinal Liquor |
|
Medicinal liquor |
|
|
0.7 |
% |
|
|
1.4 |
% |
|
|
1.6 |
% |
|
To improve blood circulation and relieve symptoms
of fatigue, low back pain and leg pain. |
| |
|
Qishe Medicinal Liquor |
|
Medicinal liquor |
|
|
0.4 |
% |
|
|
0.3 |
% |
|
|
0.4 |
% |
|
To treat blood stasis, arthritis, and numbness in
the feet and hands. |
| Cold and Flu Medicines Medicinal
Liquor |
|
Qiangli Pipa Syrup |
|
Syrup |
|
|
9.6 |
% |
|
|
3.3 |
% |
|
|
6.9 |
% |
|
Relieve cough and reduce mucus and
phlegm. |
| |
|
Paracetamol Granule for Children |
|
Granules |
|
|
2.7 |
% |
|
|
1.9 |
% |
|
|
1.6 |
% |
|
To relieve children’s headaches, muscle aches,
toothaches, colds and fevers. |
| |
|
Isatis Root Granule |
|
Granules |
|
|
2.4 |
% |
|
|
3.6 |
% |
|
|
5.0 |
% |
|
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, 2021,
2020, and 2019, the revenue derived from the sale of Guben Yanlin
Pill represented 40.3%, 38.2%, and 32.4% of our total
revenue.
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. For the fiscal year ended
September 30, 2021, no supplier accounted for more than 10% of our
total purchases. For the fiscal year ended September 30, 2020, two
suppliers accounted for approximately 19.6% and 13.6% of our total
purchases, respectively. For the fiscal year ended September 30,
2019, one supplier accounted for approximately 14.1% of our total
purchases. 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.
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
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, 2021, we had distributed roughly 2,766 third-party
products, of which approximately 87.30% are biochemical drugs, such
as liquid glucose, prednisolone, and citicoline, approximately
12.58% are medical instruments, such as drug-eluting stents,
surgical tubes and syringes, approximately 0.11% are TCMPs, such as
red sage tables, Longdan Xiegan pills, and Chinese skullcap
capsules and approximately 0.01% are dietary supplements, such as
vitamins, probiotic powder, and calcium tablets. 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 distributors.
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, 2021, 2020 and 2019, we
purchased products from over 665, 728 and 650 suppliers,
respectively. For the fiscal years ended September 30, 2021, 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 distributors, hospitals,
clinics and drugstore chains with pharmaceutical business
qualification certificates, awarded and authorized by the NMPA and
are authorized to sell and deliver our products to end consumers.
As of the date of this annual report, our customers are scattered
over 202 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, 2021, we have total of 2,708 customers, of which
1,422 were pharmaceutical distributors, 542 were clinics, 489 were
drug stores, and 255 were hospitals.
For
the fiscal year ended September 30, 2021, our revenues generated
from sales to pharmaceutical distributors, hospitals, clinics and
drugstore chains represented 59.78%, 29.63%, 10.24% and 0.35% of
our total revenues, respectively. 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% of our total revenues,
respectively.
None
of our customers generated more than 10% of our revenue for the
fiscal years ended September 30, 2021, 2020 and 2019. However, our
top 10 customers aggregately accounted for 30.4%, 33.3% and 34.5%
of our total revenue for the fiscal years ended September 30, 2021,
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,
2021, we had a total of 81 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 September 30, 2021, we had
24 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.
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 our products
The following table sets forth the competitors of our products.
|
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. |
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.
Employees
As of
September 30, 2021, 2020, and 2019, we had a total of 263, 169, and
176 employees, all of which are located in China. The following
table sets forth the number of our employees by function as of
September 30, 2021.
|
Function |
|
Number
of
Employees
|
|
%
of
Total
|
|
| Purchasing
Department |
|
9 |
|
|
3 |
% |
| Warehouse Department |
|
14 |
|
|
5 |
% |
| Manufacturing Department |
|
102 |
|
|
39 |
% |
| Quality Control Department |
|
18 |
|
|
7 |
% |
| Research and Development
Department |
|
24 |
|
|
9 |
% |
| Marketing Department |
|
81 |
|
|
31 |
% |
| Finance Department |
|
8 |
|
|
3 |
% |
| Administration Department |
|
7 |
|
|
3 |
% |
| Total |
|
263 |
|
|
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.
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 annual
report.
Properties
and Facilities
Our corporate headquarters are 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. As of the date of this annual
report, we have registered 13 patents in China, including 11
utility model patents and two invention patents, and 99 trademarks
in China, including our well-recognized brands “Bai Nian Dan
(百年丹)”, “Hu Zhuo
Ren (胡卓仁)” and “Long
Zhong (龙种).”
We
implement a set of comprehensive measures to protect our
intellectual property, in addition to making trademark and patent
registration application. Key measures include : (i) timely
registration, filing and application for ownership of our
intellectual property, (ii) actively tracking the registration and
authorization status of our intellectual property and take action
in a timely manner if any potential conflicts with our intellectual
property are identified, (iii) clearly stating all rights and
obligations regarding the ownership and protection of our
intellectual property in all employment contracts and commercial
contracts we enter into.
As of
the date of this annual report, we have not been subject to any
material dispute or claims for infringement upon third parties’
trademarks, licenses and other intellectual property rights in
China.
Seasonality
We
currently do not experience seasonality in our business.
Environmental
Matters
We
comply with the Environmental Protection Law of China as well as
applicable local regulations. In addition to statutory and
regulatory compliance, we actively ensure the environmental
sustainability of our operations. Parties may be levied upon us if
we fail to adhere to and maintain certain standards. Such failure
has not occurred in the past, and we generally do not anticipate
that it will occur in the future, but no assurance can be given in
this regard.
Insurance
We
maintain certain insurance policies to safeguard us against risks
and unexpected events. For example, we provide social security
insurance including pension insurance, unemployment insurance,
work-related injury insurance and medical insurance for our
employees in compliance with applicable PRC laws. We do not
maintain business interruption insurance or product liability
insurance, which are not mandatory under PRC laws. We do not
maintain key man insurance, insurance policies covering damages to
our network infrastructures or information technology systems nor
any insurance policies for our properties. During the fiscal years
ended September 30, 2021, 2020 and 2019, we did not make any
material insurance claims in relation to our business.
Legal
Proceedings
We
may from time to time become a party to various legal
administrative proceedings arising in our ordinary course of our
business. As of the date of this annual report, neither we nor any
of our subsidiaries is a party of any material legal
proceeding.
Regulations
This
section sets forth a summary of the principal PRC laws,
regulations, and rules relevant to our PRC operating entities’
business and operations in China.
We
are a pharmaceutical manufacturer in China. This section sets forth
a summary of applicable laws, rules, regulations, government and
industry policies and requirement that have a significant impact on
our operations and business in China. This summary does not purport
to be a complete description of all laws and regulations, which
apply to our business and operations. Investors should note that
the following summary is based on relevant laws and regulations in
force as of the date of this annual report, which may be subject to
change.
Major
Regulatory Authorities
The
pharmaceutical industry in the PRC is mainly administered by four
governmental agencies: (i) the NMPA, a department under the State
Administration for Market Regulation (the “SAMR”) (国家市场监督管理总局),
(ii) the National Health Commission (the “NHC”) (国家卫生健康委员会), (iii)
the National Administration of Traditional Chinese Medicine (the
“NATCM”) (国家中医药管理局), and (iv) the National Healthcare Bureau (the
“NHB”) (国家医疗保障局).
The
NMPA, whose predecessor is the China Food and Drug Administration,
or the CFDA, is the primary regulator of almost all key stages of
the life-cycle of pharmaceutical products, including non-clinical
researches, clinical trials, marketing approvals, manufacturing,
advertising and promotion, distribution and
pharmacovigilance.
The
NHC, formerly known as the National Health and Family Planning
Commission, is the principal regulator of healthcare in China. It
is primarily responsible for drafting national healthcare policies
and regulating public health, medical services and health
contingency system, coordinating the healthcare reform and
overseeing the operation of medical institutions and professional
practice of medical personnel. The NHC is responsible for (1) the
research, production, circulation and use of Chinese medicines,
including traditional Chinese medicine; (2) the preparation and
publication of the Chinese Pharmacopoeia; and (3) the supervision
of the selection, approval, distribution and revision of the
National OTC Drug Catalogue. In addition, the CFDA and its local
administrative authorities may take a number of enforcement actions
to enforce their regulations.
The
NATCM is an agency under the NHC that oversees China’s traditional
Chinese medicine industry.
The
NHB, a new authority established in May 2018, is responsible for
(1) drafting and implementing policies, plans and standards on
medical insurance, maternity insurance and medical assistance; (2)
administering healthcare fund; (3) formulating a uniform medical
insurance catalogue and payment standards on drugs, medical
disposables and healthcare services; and (4) formulating and
administering the bidding and tendering policies for drugs and
medical disposables.
Regulations
Related to Pharmaceutical Manufacture
Manufacturing License
Pursuant
to the Pharmaceutical Administration Law of the People’s Republic
of China (《中华人民共和国药品管理法》), which was promulgated in 1984 by the
SCNPC and last amended in April 2015, a pharmaceutical manufacturer
is required to obtain its manufacturing license from the NMPA
before it starts to manufacture pharmaceutical products. Prior to
granting such permit, the relevant government authority will
inspect the applicant’s production facilities, and assess whether
the sanitary conditions, quality assurance system, management
structure and equipment at the production facilities have met the
required standards. A manufacturing license is valid for a period
of five years and the manufacturer is required to apply for renewal
within six months prior to its expiration date. The manufacturer
will be subject to reassessment by the authority in accordance with
then prevailing legal and regulatory requirements for the purposes
of such renewal. Currently, our subsidiary Jiangxi Universe holds a
valid manufacturing license from the NMPA issued on December 21,
2020 and valid until December 20, 2025.
Contract Manufacturing of Drugs
Pursuant
to the Administrative Regulations for the Contract Manufacturing of
Drugs (《药品委托生产监督管理规定》) (the “Contract Manufacturing Regulations”)
issued by the NMPA in August 2014, in the event that a drug
manufacturer in China with drug marketing authorization temporarily
lacks manufacturing capability as a result of technology upgrade or
is unable to meet market demand due to insufficient manufacturing
capacity, it may use contract manufacturer for its drug
manufacturing. Contract manufacturing arrangements need to be
approved by the provincial branch of the NMPA. The Contract
Manufacturing Regulations prohibit contract manufacturing
arrangements for certain special drugs, including narcotic drugs,
psychoactive drugs, biochemical drugs and active pharmaceutical
ingredients.
Other
Regulations in relation to the Pharmaceutical
Industry
“Two-vote system” for drug sales
The
NHC and other six ministries and commissions issued the Notice on
the Opinions on the Implementation of the “Two-Invoice System” in
Drug Procurement by Public Medical Institutions (for Trial
Implementation) (《关于在公立医疗机构药品采购中推行“两票制”的实施意见 (试行) 的通知》) (the
“Notice on Two-Invoice System”) on January 11, 2017. “Two-invoice
system” means that one invoice shall be issued by a pharmaceutical
manufacturer to a distributor, and another invoice shall be issued
by the distributor to a hospital. An internal transfer of drugs
from a group pharmaceutical distributor to its wholly owned or
controlled subsidiary or a transfer of drugs between such wholly
owned subsidiaries may not be deemed as “one invoice” however, the
invoicing for the whole group can be done only once. Pharmaceutical
manufacturers and distributors shall reasonably determine the
markup level in the spirit of fairness, legality, legitimacy and
integrity. Public medical institutions is encouraged to settle the
payment for drugs directly with pharmaceutical manufacturers, and
pharmaceutical manufacturers and are encouraged to settle the
delivery cost with distributors.
In
the sale of drugs, drug manufacturers and distributors shall issue
value-added tax (“VAT”) special invoices or normal VAT invoices in
accordance with the regulations regarding invoice control. The sold
drug shall also be delivered in a way that confirms to the
requirements of the Good Supply Practice for Pharmaceutical
Products (2016 version) (《药品经营质量管理规范(2016修订)》), and the names of
the purchaser and seller on the invoices shall be consistent with
the delivery form, payment flow and amount.
Drug Advertisements
Pursuant
to the Interim Administrative Measures for the Review of
Advertisements for Drugs, Medical Devices, Health Food and Formula
Food for Special Medical Purposes
(《药品、医疗器械、保健食品、特殊医学用途配方食品广告审查管理暂行办法》) promulgated on December 24,
2019 and effective on March 1, 2020, an enterprise seeking to
advertise its drugs must apply for an advertising approval code. An
advertising approval code shall expire on the earlier of the
expiration dates of the product’s registration certificate, filing
certificate or production license. If an expiration date is not
prescribed in the product’s registration certificate, filing
certificate or production license, the advertising approval code
shall be valid for two years. The contents of an approved
advertisement shall not be altered without prior approval. Where an
advertisement needs to be edited, the enterprise shall submit an
application for a new advertisement approval code.
Insert Sheet, Labels and Packaging of Pharmaceutical
Products
According
to the Measures for the Administration of the Insert Sheets and
Labels of Drugs (《药品说明书和标签管理规定》) effective on June 1, 2006, the
insert sheets and labels of a pharmaceutical product shall be
reviewed and approved by the NMPA. A drug insert sheet should
include the scientific data, conclusions and information concerning
drug safety and efficacy in order to direct the safe and reasonable
use of pharmaceutical products. The inner label of a pharmaceutical
product shall indicate the product name, indication or function,
strength, dose and usage, production date, batch number, expiration
date and drug manufacturer, and the outer label of a pharmaceutical
product shall indicate the product name, ingredients, description,
indication or function, strength, dose and usage and adverse
reactions.
According
to the Measures for the Administration of Pharmaceutical Packaging
(《药品包装管理办法》) effective on September 1, 1988, pharmaceutical
packaging must comply with national and professional standards. If
no national or professional standards are available, a manufacturer
can formulate and implement its own standards after it receives
approval from the provincial food and drug administration or bureau
of standards. The company shall reapply for approval if it were to
change its own packaging standards. Pharmaceutical products with no
approved packing standards shall not be sold or traded in the PRC,
except for drugs for military use.
Drug Technology Transfer
On
August 19, 2009, the NMPA promulgated the Administrative
Regulations for Technology Transfer Registration of Drugs
(《药品技术转让注册管理规定》) (the “Technology Transfer Regulations”) to
regulate the drug technology transfer process, including the
application, evaluation, examination, approval and monitoring of,
drug technology transfer. Drug technology transfer means that the
owner transfers its pharmaceutical manufacturing technology to a
pharmaceutical manufacturer and that the transferee applies for
drug registration pursuant to the Technology Transfer Regulations.
Drug technology transfer includes the transfer of new drug
technology and drug manufacturing technology.
Applications
for drug technology transfer shall be submitted to the provincial
drug regulatory authority where the transferee is located. The drug
regulatory authority examines application materials and conducts
on-site inspections of the transferee’s manufacturing facilities.
If the transferor and the transferee are located in different
provinces, the provincial drug regulatory authority where the
transferor is located shall issue examination opinions as well. The
Center for Drug Evaluation (the “CDE”), a branch of the NMPA, shall
further review the application materials, provide technical
evaluation opinions and form a comprehensive evaluation opinion
based on the on-site inspection reports and the testing results of
the samples. The NMPA shall determine whether to approve the
application according to the comprehensive evaluation opinion of
the CDE. An approval letter of supplementary application and a drug
approval number will be issued for qualified
applications.
Price of drugs
Pursuant
to the Drug Administration Law (《药品管理法》), for those drugs whose
prices are determined by market, manufacturers and distributors of
pharmaceutical products and medical institutions shall set the
prices in accordance with the principles of fairness, rationality,
and good faith, and provide consumers with drugs at reasonable
prices. Pharmaceutical product manufacturers, distributors and
medical institutions shall determine and indicate their products’
retail prices in accordance with the regulations over drug prices
promulgated by the pricing department of the State Council of the
People’s Republic of China (the “State Council”).
On
May 4, 2015, the National Development and Reform Commission, the
National Health and Family Planning Commission, the Ministry of
Human Resources and Social Security, the Ministry of Industry and
Information Technology, the Ministry of Finance, the MOFCOM and the
NMPA jointly issued the Notice Regarding Reforms to the Price of
Medical Products (《关于印发推进药品价格改革意见的通知》), pursuant to which, since
June 1, 2015, other than anesthetics and Class 1 psychotropic
drugs, the actual price of pharmaceutical products shall be decided
by market instead of by the government. As of the date of this
annual report, the actual price of all products we sell, including
TCMD products and third-party products, are determined by
market.
Regulation
in relation to medical device registration
Pursuant
to the Regulations on Supervision and Administration of Medical
Devices (《医疗器械监督管理条例》) promulgated by the State Council of China
with the last amendment effective on June 1, 2021, medical devices
are classified based on the invasiveness of, and risks associated
with, each medical device. Class I medical devices have relatively
low risks, whose safety and effectiveness can be guaranteed through
routine administration. Class II medical devices have moderate
risks and require strict control and administration to ensure their
safety and effectiveness. Class III medical devices have relatively
high risks and require especially strict control and administration
measures to ensure their safety and effectiveness. Pursuant to the
Administrative Measures for the Medical Devices Registration and
Record (《医疗器械注册与备案管理办法》), which became effective on October 1,
2021, manufacturers of Class I medical devices are required to file
with the local food and drug administrative authority at the city
level. Manufacturers of Class II medical devices shall obtain
product registration certificates from and be subject to the
inspection and approval of the drug administrative authority at the
provincial level. Manufacturers of Class III medical devices shall
obtain product registration certificates from the NMPA and be
subject to its inspection and approval.
As of
the date of this annual report, we are engaged in the business of
selling medical devices. We sell medical devices categorized as
Class I, Class II and Class III under the Regulation on Supervision
and Administration of Medical Devices in the PRC, and we obtained
our medical device selling license in April 2020 in compliance with
the applicable PRC laws and regulations.
Regulation
relating to Company Establishment and Foreign
Investment
The
PRC Company Law applies to the establishment, operation and
management of both PRC domestic companies and foreign-invested
enterprises. Foreign investment in the PRC corporate entities are
also regulated by the oreign-Owned Enterprise Law of the PRC
(《中华人民共和国外资企业法》) (the “Foreign-Owned Enterprise Law”) promulgated
on April 12, 1986 and amended on October 31, 2000 and September 3,
2016, the Implementing Rules for the Foreign-Owned Enterprise Law
of the PRC (《中华人民共和国外资企业法实施细则》) promulgated on December 12, 1990
and amended on April 12, 2001 and February 19, 2014, and the
Interim Administrative Measures for the Record-filing of the
Incorporation and Change of Foreign-invested Enterprises
(《外商投资企业设立及变更备案管理暂行办法》) (the “Record-filing Measures”) promulgated
on October 8, 2016 and amended on July 30, 2017 and June 29, 2018.
Under these laws and regulations, the establishment of a wholly
foreign-owned enterprise is subject to the approval of, or the
filing with the MOFCOM or its local counterpart, and such wholly
foreign-owned enterprises must register and file with the
appropriate administrative bureau of industry and
commerce.
The
Foreign Investment Law of the People’s Republic of China
(《中华人民共和国外商投资法》) (the “Foreign Investment Law”), which was
promulgated by the National People’s Congress On March 15, 2019,
and came into effect on January 1, 2020, provides that foreign
investment refers to the investment activities in China carried out
directly or indirectly by foreign natural persons, enterprises or
other organizations (the “Foreign Investors”), including the
following: (1) Foreign Investors establishing foreign-invested
enterprises in China alone or collectively with other investors;
(2) Foreign Investors acquiring shares, equities, properties or
other similar rights of Chinese domestic enterprises; (3) Foreign
Investors investing in new projects in China alone or collectively
with other investors; and (4) Foreign Investors investing through
other ways prescribed by laws and regulations or the State Council.
The State adopts the management system of pre-establishment
national treatment and negative list for foreign investment. The
pre-entry national treatment means the treatment given to Foreign
Investors and their investments at the stage of investment access
is not lower than that of domestic investors and their investments.
The negative list management system means that the state implements
special administrative measures for access of foreign investment in
specific fields. Foreign investors shall not invest in any
forbidden fields stipulated in the negative list and shall mean the
conditions stipulated in the negative list before investing in any
restricted fields. The negative list is released upon approval of
the State Council. After the Foreign Investment Law came into
effect, it replaced the Foreign-Owned Enterprise Law.
The
Implementation Regulations for the Foreign Investment Law of the
PRC (《中华人民共和国外商投资法实施条例》) (the “Implementation Regulations for the
FIL”) was adopted at the 74th executive meeting of the State
Council on December 12, 2019 and came into effect on January 1,
2020. The purpose of the Implementation Regulations for the FIL is
to encourage and promote foreign investment, protect the legitimate
rights and interests of investors, regulate the administration of
foreign investment, and continuously optimize the foreign
investment environment. For those foreign-invested enterprises
established prior to the implementation of the Foreign Investment
Law and established in accordance with the Law of the People’s
Republic of China on Sino-foreign Joint Ventures
(《中华人民共和国中外合资经营企业法》), the Law of the People’s Republic of China on
Foreign-invested Enterprises, and the Law of the People’s Republic
of China on Sino-Foreign Cooperative Enterprises, they can modify
or retain their organizational forms and organizational structures
in accordance with the PRC Company Law, Partnership Law of the
People’s Republic of China and other applicable laws within 5 years
since the implementation of the Foreign Investment Law.
Foreign
investment in China shall comply with the Catalogue for the
Guidance of Foreign Investment Industries (2017 Revision)
(《外商投资产业指导目录(2017年修订)》) (the “2017 Catalogue”), which was
promulgated on June 28, 2017 and became effective on July 28, 2017,
and the Special Administrative Measures for the Access of Foreign
Investment (Negative List) (Edition 2018) (《外商投资准入特别管理措施(负面清单)
(2018年版)》) (the “2018 Negative List”) which were promulgated on
June 28, 2018 and became effective on July 28, 2018. The Catalogue
classifies foreign-invested industries into two categories, (1)
encouraged foreign-invested industries; and (2) foreign-invested
industries that are subject to the 2018 Negative List. The 2018
Negative List set out restrictions such as shareholding
requirements and qualifications of the senior management. According
to the Record-filing Measures, foreign investments that are not
subject to special access administrative measures are only required
to complete an online filing with the MOFCOM or its local
counterpart. The Catalogue for Encouraged Foreign Investment (2020
Revision) (《鼓励外商投资产业目录(2020年版)》), or the 2020 Catalogue, and the
Special Administrative Measures for the Access of Foreign
Investment (Negative List) (Edition 2021) (《外商投资准入特别管理措施(负面清单)
(2021年版)》), or the 2021 Negative List, which were issued on
September 18, 2021 and came into effect on December 27, 2021,
further reduced restrictions on foreign investment. The 2020
Catalogue and the 2021 Negative List replaced the 2017 Catalogue
and the 2018 Negative List. The scope of our business as approved
by the licensing authority and the actual scope of our business are
not subject to the restrictions set forth in the 2021 Negative
List.
The
M&A Rules were jointly promulgated by the MOFCOM, the
State-Owned Assets Supervision and Administration Commission of the
State Council, the SAT, the SAIC, the CSRC, and the SAFE on August
8, 2006 and was amended by MOFCOM on June 22, 2009. The M&A
Rules provides that a foreign investor is required to obtain
necessary approvals when it: (1) acquires equity interests in a
domestic enterprise or subscribes to additional shares in a
domestic enterprise; (2) purchases the assets of a domestic
enterprise through establishment of a foreign-invested enterprise;
or (3) establishes a foreign-invested enterprise through which it
purchases the assets of a domestic enterprise and operates these
assets. In particular, any PRC company, enterprise or individual is
required to obtain approval from the MOFCOM and comply with
applicable laws and regulations if it establishes an offshore
company and attempts to acquire a domestic enterprise related to
such offshore company.
Regulation
in relation to Intellectual Property Rights
In
terms of international conventions, China has entered into
(including but not limited to) the Agreement on Trade-Related
Aspects of Intellectual Property Rights (《与贸易有关的知识产权协定》), the Paris
Convention for the Protection of Industrial Property
(《保护工业产权巴黎公约》), the Madrid Agreement Concerning the International
Registration of Marks (《商标国际注册马德里协定》) and the Patent Cooperation
Treaty (《专利合作协定》).
Patents
Pursuant
to the Patent Law of the PRC (《中华人民共和国专利法》), or the Patent Law,
promulgated by the SCNPC on March 12, 1984 and last amended on
October 17, 2020 and effective from June 1, 2021 and the
Implementation Rules of the Patent Law of the PRC
(《中华人民共和国专利法实施细则》), promulgated by the State Council on June 15,
2001 and amended on December 28, 2002 and January 9, 2010,
respectively, patents in China fall into three categories:
invention patents, utility model patents and design patents. The
term of patent protection starts from the date of application and
lasts 20 years for invention patents and 10 years for utility model
patents and design patents. Any individual or entity that utilizes
a patent or conducts any other activity that infringes a patent
without the patent holder’s authorization shall pay compensation to
the patent holder and be subject to a fine imposed by regulatory
authorities and, if such behavior constitutes a crime, shall be
held criminally liable in accordance with applicable laws.
According to the Patent Law, for public health purposes, the State
Intellectual Property Office of the PRC, or SIPO, may grant a
compulsory license for manufacturing patented drugs and exporting
them to countries or regions covered under relevant international
treaties to which PRC has acceded. In addition, under the Patent
Law, any organization or individual that applies for a patent in a
foreign country for an invention or utility model patent
established in China is required to report to the SIPO for
confidentiality examination. Patent holders may apply for extending
the terms of patented drugs to compensate for commercialization
delays due to regulatory review, and may seek punitive damages for
willful patent infringement under severe
circumstances.
Trade Secrets
Pursuant
to the PRC Anti-Unfair Competition Law (《中华人民共和国反不正当竞争法》)
promulgated by the SCNPC in September 1993, as amended on November
4, 2017 and April 23, 2019 respectively, the term “trade secrets”
refers to technical and business information that is unknown to the
public, has utility, may create business interests or profits for
its legal owners or holders, and is maintained as a secret by its
legal owners or holders. Under the PRC Anti-Unfair Competition Law,
business persons are prohibited from infringing others’ trade
secrets by: (1) obtaining trade secrets from the legal owners or
holders by any unfair methods, such as theft, bribery, fraud,
coercion, electronic intrusion, or any other illicit means; (2)
disclosing, using or permitting others to use the trade secrets
obtained illegally under item (1) above; or (3) disclosing, using
or permitting others to use the trade secrets, in violation of any
contractual agreements or any requirements of the legal owners or
holders to keep such trade secrets in confidence. If a third party
knows or should have known of the above- mentioned illegal conduct
but nevertheless obtains, uses or discloses trade secrets of
others, the third party may be deemed to have committed a
misappropriation of the others’ trade secrets. The parties whose
trade secrets are being misappropriated may petition for
administrative corrections, and regulatory authorities may stop any
illegal activities and impose fines on the infringing
parties.
Trademarks
In
accordance with the Trademark Law of the PRC (《中华人民共和国商标法》) (the
“Trademark Law”), which was promulgated by the SCNPC on August 23,
1982, and was last amended on April 23, 2019 and came into effect
on November 1, 2019, any trademark which is registered with the
approval of the Trademark Office is a registered trademark,
including commodity trademark, service trademark, collective
trademark, certification trademark, and the trademark registrant
has the exclusive right to use a registered trademark and such
right is protected by law. A registered trademark is valid for a
period of 10 years commencing from the date on which the
registration is approved. Upon expiration of the trademark, the
registrant shall apply for renewal within twelve months prior to
the expiration date if it intends to maintain exclusive use of the
trademark. If the registrant fails to apply for renewal, a grace
period of six months may be granted. In the absence of a renewal
upon the expiration of a trademark registration, the registered
trademark shall be canceled. Use of a trademark that is identical
with or similar to a registered trademark, for the same kind of or
similar commodities, without authorization of the trademark
registrant, constitutes infringement of the exclusive right to use
a registered trademark. Industrial and commercial administrative
authorities have the authority to investigate any behavior that may
constitute an infringement of the exclusive right under a
registered trademark.
Domain names
Domain
names are protected under the Administrative Measures on the
Internet Domain Names (《互联网域名管理办法》), which was promulgated by the
Ministry of Industry and Information Technology, or the MIIT, on
August 24, 2017 and came into effect on November 1, 2017, and the
Implementing Rules of China Internet Network Information Center on
the Registration of Domain Names (《中国互联网络信息中心域名注册实施细则》) issued by
China Internet Network Information Center (the “CNNIC”) on May 28,
2012 and came into effect on May 29, 2012. Domain name
registrations are handled through domain name service agencies
established under the relevant regulations, and the applicant
becomes domain name holder upon successful registration. Domain
name disputes shall be submitted to an organization authorized by
CNNIC for resolution.
Other
laws
Product Liability
The
Product Quality Law of the PRC (《中华人民共和国产品质量法》), promulgated by the
SCNPC on February 22, 1993 and last amended on December 29, 2018,
governs the supervision and administration of product quality and
specifies the liabilities of manufacturers and sellers. A
manufacture shall be liable for compensating for any bodily
injuries or property damages, other than the defective product
itself, resulting from the defects in the product, unless the
manufacturer is able to prove that: (1) the product has never been
distributed; (2) the defects causing injuries or damage did not
exist at the time when the product was distributed; or (3) the
science and technology at the time when the product was distributed
was at a level incapable of detecting the defects. A seller shall
pay compensation if it fails to indicate either the manufacturer or
the supplier of the defective product. A person who is injured or
whose property is damaged by the defects in the product may claim
for compensation from the manufacturer or the seller.
Pursuant
to the Civil Code of the People’s Republic of China (《中华人民共和国民法典》),
promulgated by the SCNPC on May 28, 2020 and became effective on
January 1, 2021, manufacturers shall assume tort liabilities where
the defects in products cause damage to others. Sellers shall
assume tort liability where the defects in products that have
caused damage to others are attributable to the sellers. The
aggrieved party may claim for compensation from the manufacturer or
the seller of the defected product that has caused
damage.
Environmental Protection
Pursuant
to the Environmental Protection Law of the PRC (《中华人民共和国环境保护法》)
promulgated by the SCNPC on December 26, 1989 and amended on April
24, 2014, the Environmental Impact Assessment Law of the PRC
(《中华人民共和国环境影响评价法》), promulgated by the SCNPC on October 28, 2002
and amended on July 2, 2016 and December 29, 2018 respectively, the
Administrative Regulations on the Environmental Protection of
Construction Project (《建设项目环境保护管理条例》) promulgated by the State
Council on November 29, 1998 and amended on July 16, 2017, and
other applicable environmental laws and regulations, an enterprise
with a project construction plan shall submit an environmental
impact assessment report, stating the environmental impacts the
project is likely to have, to the administrative authority of
environmental protection for approval. Enterprises shall engage
qualified institutions to issue the environmental impact assessment
reports.
According
to the Law of the PRC on the Prevention and Control of Water
Pollution (《中华人民共和国水污染防治法》) promulgated by the SCNPC on May 11,
1984 and last amended on June 27, 2017, and effective on January 1,
2018, the Law of the PRC on the Prevention and Control of
Atmospheric Pollution (《中华人民共和国大气污染防治法》) promulgated by the SCNPC
on September 5, 1987 and last amended on October 26, 2018, the Law
of the PRC on the Prevention and Control of Pollution from
Environmental Noise (《中华人民共和国环境噪声污染防治法》) promulgated by the SCNPC
on October 29, 1996 and amended on December 29, 2018, and the Law
of the PRC on the Prevention and Control of Environmental Pollution
of Solid Waste (《中华人民共和国固体废物污染环境防治法》), promulgated by the SCNPC on
October 30, 1995 and last amended on April 29, 2020, all the
enterprises that may cause environmental pollution in the course of
their business operation shall implement preventive and curative
environmental protection measures in their plants and establish a
reliable environmental protection system.
We
strictly complied with the applicable environmental laws and
regulations in constructing our factory. On December 8, 2004, the
environmental protection bureau of local government determined that
the environmental protection facilities we constructed for our
factory satisfied the relevant standards. According to the
certificate issued by the ecological environment bureau of local
government (the “Bureau”), our factory has not been assessed on its
environmental impacts since its establishment in 2004. Although
there were certain procedural defects in the original construction
process, we constructed our environmental protection facilities for
our factory in strict compliance with the requirements of
applicable PRC environmental laws and regulations. Our
environmental protection facilities were approved by the Bureau in
December 2004 and have since been under normal operations. As of
the date of the date of this annual report, we have not been found
in violation of applicable environmental laws or regulations, or
imposed of administrative penalties by environmental protection
authorities in the past three years. No environmental pollution
incident has occurred on our manufacturing facility.
Foreign Exchange Control
Pursuant
to the Foreign Exchange Administration Regulations of the PRC
(《中华人民共和国外汇管理条例》), as amended on August 5, 2008, and the Regulation
on the Administration of the Foreign Exchange Settlement, Sales and
Payment (《结汇、售汇及付汇管理规定》), or the Settlement Regulations,
promulgated by the People’s Bank of China on June 20, 1996 and came
into effect on July 1, 1996, foreign exchanges required for profit
distributions and dividend payments may be purchased from
designated foreign exchange banks in the PRC upon presentation of a
board resolution authorizing distribution of profits or payment of
dividends.
According
to the Notice of SAFE on Further Improving and Adjusting Foreign
Exchange Administration Policies on Direct Investment
(《国家外汇管理局关于进一步改进和调整直接投资外汇管理政策的通知》) (the “Circular No. 59”),
promulgated on November 19, 2012 and last amended on December 30,
2019 by the State Administration of Exchange Control, or the SAFE,
(1) the opening of and payment into foreign exchange accounts under
direct investment accounts are no longer subject to approval by the
SAFE; (2) reinvestment with legal income of foreign investors in
China is no longer subject to approval by SAFE; (3) the procedures
for capital verification and confirmation that foreign-funded
enterprises need to go through are simplified; (4) purchase and
external payment of foreign exchange under direct investment
accounts are no longer subject to approval by SAFE; (5) domestic
transfer of foreign exchange under direct investment account is no
longer subject to approval by SAFE; and (6) the administration over
the conversion of foreign exchange capital of foreign-invested
enterprises is improved.
Pursuant
to the Circular 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 “SAFE Circular No. 13”), which was
promulgated on February 13, 2015 and became effective on June 1,
2015, the foreign exchange registration under domestic direct
investment and the foreign exchange registration under foreign
direct investment is directly reviewed and handled by banks in
accordance with the Circular No. 13, and the SAFE and its branches
shall perform indirect regulation over the foreign exchange
registration via banks.
Pursuant
to the Circular on the Reform of the Management Method for the
Settlement of Foreign Exchange Capital of Foreign-invested
Enterprises (《国家外汇管理局关于改革外商投资企业外汇资本金结汇管理方式的通知》) promulgated by the
SAFE on March 30, 2015 and became effective on June 1, 2015, and
the Circular on the Reform and Standardization of the Management
Policy of the Settlement of Capital Projects
(《国家外汇管理局关于改革和规范资本项目结汇管理政策的通知》) promulgated by the SAFE on June 9,
2016, the settlement of foreign exchange by foreign invested
enterprises shall be governed by the policy of foreign exchange
settlement on a discretionary basis. However, the settlement of
foreign exchange shall only be used for its own operation purposes
within the business scope of the foreign invested enterprises in
accordance with the principle of authenticity.
Pursuant
to the Circular 37, a PRC resident shall register with the local
SAFE branch before he or she contributes assets or equity interests
in an overseas special purpose vehicle (“Overseas SPV”) , that is
directly established or controlled by the PRC Resident for the
purpose of conducting investment for financing. Failure to comply
with the SAFE registration requirements could result in penalties
for evasion of foreign exchange controls. The Circular No. 13
provides that banks can directly handle the initial foreign
exchange registration and amendment registration under the Circular
37. Mr. Gang Lai completed the initial foreign registration on June
3, 2019.
Labor and Social Insurance
Pursuant
to the Labor Contract Law (《中华人民共和国劳动合同法》), which was promulgated
by the SCNPC on June 29, 2007 and became effective on January 1,
2008, and amended on December 28, 2012 and became effective on July
1, 2013, and the Implementing Regulations of the Labor Contracts
Law of the PRC (《中华人民共和国劳动合同法实施条例》), which was promulgated by the
State Council on September 18, 2008, labor contracts shall be
concluded in writing if employment relationships are to be or have
been established between employers and employees. In addition,
employee wages cannot be lower than local standards on minimum
wages.
Pursuant
to the Labor Law of the PRC (《中华人民共和国劳动法》), which was promulgated
by the SCNPC on July 5, 1994 and last amended and came into effect
on December 29, 2018, employers shall establish and improve their
system of workplace safety and sanitation, strictly abide by state
rules and standards on workplace safety, educate employees in
occupational safety and sanitation in the PRC. Occupational safety
and sanitation facilities shall comply with state-fixed standards.
Enterprises and institutions shall provide employees whose work
involves occupational hazards with health examinations on a regular
basis.
According
to the Social Insurance Law, the Interim Regulations on the
Collection and Payment of Social Security Funds (《社会保险费征缴暂行条例》),
which was promulgated by the State Council on January 22, 1999 and
amended on March 24, 2019, and the Administrative Regulations on
the Housing Provident Funds (《住房公积金管理条例》), 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. Any employer who fails to
make contributions may be fined and ordered to make good the
deficit within a stipulated time limit.
Prior
to April 2020, we only contributed to the social insurance and
housing provident funds for some, but not all, of our employees.
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 0.2% per day on the total
outstanding contribution. We started to contribute to the social
insurance and housing provident funds for all of our employees
since April 2020.
Since
April 2020, we have been contributing to the social insurance and
housing provident funds for our employees in accordance with the
minimum contribution requirements. Pursuant to the aforementioned
applicable laws and regulations, the government or an employee has
the right to demand us to contribute to the employee’s social
insurance and housing provident funds calculated based on his or
her actual salary, and an employee who has not received
contributions from us has the right to demand us to contribute to
his or her social insurance and housing provident funds. As
confirmed in writing by the local government, our contributions of
the social insurance and housing provident funds are in compliance
with the PRC laws and the local regulations and policies, and
therefore the local government is very unlikely to impose any
penalty on us for our contributions since April 2020.
Enterprise Income Tax
According
to the EIT Law, promulgated by the National People’s Congress on
March 16, 2007, effective on January 1, 2008 and last amended on
December 29, 2018, and the Implementation Regulations for the
Enterprise Income Tax Law of the PRC (《中华人民共和国企业所得税法实施条例》)
promulgated by the State Council on December 6, 2007 and amended on
April 23, 2019, other than a few exceptions, the income tax rate
for both domestic enterprises and foreign-invested enterprises is
25%. Enterprise taxpayers are classified as either resident
enterprises or non-resident enterprises. Resident enterprises are
defined as enterprises that are established in China in accordance
with PRC laws, or that are established in accordance with the laws
of foreign countries but whose actual or de facto management bodies
are located in China. Non-resident enterprise refers to an entity
established under foreign law whose de facto management bodies are
not within the PRC but which have an establishment or place of
business in the PRC, or which do not have an establishment or place
of business in the PRC but have income sourced within the PRC. An
income tax rate of 10% will normally be applicable to dividends
declared to non-PRC resident enterprise investors that do not have
an establishment or place of business in the PRC, or that have such
establishment or place of business but the relevant income is not
effectively connected with the establishment or place of business,
to the extent such dividends are derived from sources within the
PRC.
Pursuant
to the Arrangement between the Mainland of China and the Hong Kong
Special Administrative Region for the Avoidance of Double Taxation
and Prevention of Fiscal Evasion with respect to Taxes on Incomes
(《内地和香港特别行政区关于对所得避免双重征税和防止偷漏税的安排》), or the Double Tax Avoidance
Arrangement, and other applicable PRC laws, 5% withholding tax rate
shall apply to the dividends paid by a PRC company to a Hong Kong
resident, provided that such Hong Kong resident directly holds at
least 25% of the equity interests in the PRC company, and 10% of
withholding tax rate shall apply if the Hong Kong resident holds
less than 25% of the equity interests in the PRC company. However,
pursuant to the Circular on Certain Issues Relating to the
Implementation of Dividend Provisions in Tax Treaties
(《关于执行税收协定股息条款有关问题的通知》) issued on February 20, 2009 by the SAT, if
a PRC tax authority determines, in its discretion, that a company
benefits from such reduced income tax rate as a result of an
arrangement that is primarily tax-driven, such PRC tax authority
may adjust the preferential tax treatment of the company. Based on
the Announcement on Certain Issues with Respect to 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》) issued by the
SAT on February 3, 2018 and effective on April 1, 2018, if an
applicant’s business activities do not constitute substantive
business activities, it could result in the negative determination
of the applicant’s status as a beneficial owner, and consequently,
the applicant could be precluded from enjoying the above-mentioned
reduced income tax rate of 5% under the Double Tax Avoidance
Arrangement.
C.
Organizational
Structure
See
“—A. History and Development of the Company.”
D. Property, Plants and Equipment
See
“—B. Business Overview—Properties and Facilities.”
Item
4A. UNRESOLVED STAFF COMMENTS
Not
applicable.
Item
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The
following discussion of our financial condition and results of
operations is based upon and should be read in conjunction with our
consolidated financial statements and their related notes included
in this annual report. This report contains forward-looking
statements. In evaluating our business, you should carefully
consider the information provided under the caption “Item 3. Key
Information—D. Risk Factors” in this annual report. We caution you
that our businesses and financial performance are subject to
substantial risks and uncertainties.
A.
Operating
Results
Overview
We
are a pharmaceutical company specializing in the development,
manufacturing, marketing and sale of 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 NMPA,
and we currently produce 13 varieties of TCMD products and sell
them in 202 cities in 30 provinces in China as of the date of this
annual report. In addition, we also sell biomedical drugs, medical
instruments, TCMPs and dietary supplements manufactured by
third-party pharmaceutical companies (collectively referred to as
“third-party products”).
Our
major customers are pharmaceutical distributors, 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.
Recent developments
Completion
of the Initial Public Offering (“IPO”)
On
March 25, 2021, we closed our IPO of 5,000,000 ordinary shares, par
value $0.003125 per share at a public offering price of $5.00 per
share. On March 29, 2021, the underwriter exercised in full its
over-allotment option to purchase an additional 750,000 ordinary
shares. The closing for the sale of the over-allotment
shares took place on March 31, 2021. Gross proceeds of our IPO,
including the proceeds from the sale of the over-allotment shares,
totaled $28.75 million, before deducting underwriting discounts and
other related expenses. Net proceeds of our IPO, including
over-allotment shares, were approximately $25.6 million. In
connection with the IPO, our ordinary shares began trading on the
Nasdaq Global Market under the symbol “UPC” on March 23,
2021.
Newly
Established Subsidiary
On
May 12, 2021, through our PRC subsidiary, Jiangxi Universe, we
established a wholly owned subsidiary, Guangzhou Universe Hanhe
Medical Research Co., Ltd. (“Universe Hanhe”) in Guangzhou City,
China, for the purpose of conducting research and development of
new pharmaceutical products in order to diversify our product
offerings in the near future. As of the date of this annual report,
Universe Hanhe has no active business operations.
Prepayment
for Construction-in-progress Project (the “CIP
Project”)
On
June 25, 2021, we entered into a construction contract with a
sub-contractor, Jiangxi Chenyuan Construction Project Co., Ltd.
(“Chenyuan”), pursuant to which, Chenyuan will construct four
manufacturing plants and an office building with a total maximum
budget of RMB165 million (approximately $25.5 million). The
construction work started on August 8, 2021, with an estimated
completion date on August 8, 2023. As of September 30, 2021, we had
made prepayment of approximately RMB69.2 million (approximately
$10.7 million) to Chenyuan to start the construction, including
land improvement, building foundation and the construction of the
manufacturing plants. As of September 30, 2021, the $10.7 million
prepayment to Chenyuan was recorded as prepayment for CIP Project
on the balance sheets.
As of September 30, 2021, future additional capital expenditure on
this CIP Project was estimated to be approximately RMB95.8 million
(equivalent to $14.8 million), among which approximately $3.8
million is required for the 12 months ending September 30, 2022.
The Company currently plans to support its ongoing CIP Project
through cash flows from operations, proceeds received from the IPO,
and if necessary, borrowings from banks. The CIP Project is
expected to be fully completed, and the new manufacturing plants
and office building are expected to be put into use by August
2023.
For a discussion of potential risks associated with our
construction agreement and the CIP Project, see “Item 3. Key
Information — D. Risk Factors — Risks Related to Our Business and
Industry — Our future success depends in part on our ability to
increase our production capacity, and we may not able to do so in a
cost-effective manner. We have engaged a third-party sub-contractor
to build manufacturing facilities and an office building for us,
and we may encounter challenges relating to the construction,
management and operation of such facilities.”
Prepayment for Advertising
On September 6, 2021, we entered into an advertising service
agreement with a third party, Guangdong Fengyang Legend Consulting
Co., Ltd. (“Fengyang Legend”), pursuant to which Fengyang Legend
agreed to assist us in developing and producing a TV advertisement
for promoting our representative TCMD products, Bai Nian Dan and
Guben Yanling Pill, and coordinating with a TV channel to broadcast
the advertisement to targeted geographic market areas. The total
advertising service fee under this agreement is RMB55 million
(approximately $8.5 million) with a service period of one year,
from October 1, 2021 to September 30, 2022. Pursuant to the terms
under this agreement, we made an advance payment in the amount of
30% of the total advertising service fee to Fengyang Legend, and we
will be required to pay Fengyang Legend in the amount of 58% of the
total advertising service fee once the TV channel on which the
advertisement will be broadcasted is determined. As of September
30, 2021, a total of RMB48.4 million (approximately $7.5 million)
had been paid to Fengyang Legend and was recorded as prepayment for
advertising services on the balance sheets. Such prepayment had
been expensed when the advertising was first broadcasted in October
2021. The remaining RMB6.6 million (approximately $1 million)
represents the monthly advertising fees to be paid in 13
installments throughout the period when the advertisement is
broadcasted through the designated TV channel.
For a discussion of potential risks associated with our advertising
service agreement, see “Item 3. Key Information — D. Risk Factors —
Risks Related to Our Business and Industry — We have made
substantial investment in advertising our products in order to
improve our brand awareness and our market position, which efforts
may not be successful, and in such event, our financial position
and results of operations may be materially and negatively
affected.”
Entry
Into a Strategic Cooperation Agreement with a Japanese
Pharmaceutical Company
On
December 1, 2021, we entered into certain agreements (the
“Agreements”) with Kitanihon Pharmaceutical Co., Ltd.
(“Kitanihon”), a Japanese pharmaceutical company, pursuant to which
(i) both parties will build a manufacturing facility in Ji’an,
Jiangxi, China, for the manufacturing and research and development
of traditional Chinese medicine derivatives products, with an
aggregate area of over 430,000 square feet, and the Company will
bear the costs associated with building the facility, and (ii) the
Company will purchase 464 shares of Kitanihon for an aggregate of
JPY176.32 million (approximately US$1.56 million).
In
relation to the Agreements, Sununion Holding Group Limited
(“Sununion”), the controlling shareholder of the Company wholly
owned by Mr. Gang Lai, the chief executive officer and chairman of
the board of directors of the Company, entered into an agreement
with Mr. Gang Lai and Kitanihon on December 1, 2021, pursuant to
which Kitanihon authorizes the Company to use certain of its
intangible assets, including technologies and certain intellectual
properties, in exchange for which Mr. Gang Lai will transfer
ordinary shares of Sununion owned by him and valued at US$2.5
million to Kitanihon. The share transfer is currently in
progress.
COVID-19
Impact
Our
business operations have been affected and may continue to be
affected by the ongoing COVID-19 pandemic. Although we resumed
our operations since early March 2020 and the impact of COVID-19 on
our operating results and financial performance for the fiscal
years 2020 and 2021 were minimal any 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 the COVID 19 pandemic may cause our
revenue and cash flows to underperform in the next 12 months from
the date of this annual report. The extent of the future impact of
the COVID-19 pandemic on our business and results of operations is
still uncertain.
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 distributors, hospitals, clinics
and drugstore chains. We currently sell our products to these
customers in 202 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, 2021,
2020 and 2019, we had a total of 2,708, 2,209 and 2,603 customers,
respectively, and no single customer accounted for more than 10% of
our total revenue of any of these fiscal years. However, our top 10
customers in the aggregate accounted for 30.4%, 33.3% and 34.5% of
our total revenues for the years ended September 30, 2021, 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
brands, 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, if we incur substantial expenses in an
unsuccessful attempt to promote and maintain our brand, or if we
fail to generate the desired level of brand recognition and
awareness through our recent television advertising efforts, or at
all, 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.
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
manufacturers 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 exceed 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,
and in the event that any of these happens, our competitors may be
able to establish 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.
COVID-19 Impact
Our
business operations has been affected and may continue to be
affected by the ongoing COVID-19 pandemic. Although we resumed
our operations since early March 2020 and the impact of COVID-19 on
our operating results and financial performance for the fiscal
years 2020 and 2021 were minimal any 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 from the date of
this annual report. The extent of the future impact of the COVID-19
pandemic on our business and results of operations 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
comparing
2021 to 2020 |
|
|
Variance
comparing
2020 to 2019 |
|
| |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
% |
|
|
% |
|
| Revenue
from sales of self-manufactured TCMD products |
|
|
61.6 |
% |
|
|
59.8 |
% |
|
|
62.9 |
% |
|
|
1.8 |
% |
|
|
(3.1 |
)% |
|
Revenue from sales of third-party products |
|
|
38.4 |
% |
|
|
40.2 |
% |
|
|
37.1 |
% |
|
|
(1.8 |
)% |
|
|
3.1 |
% |
| Total
revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of
customers |
|
|
2,708 |
|
|
|
2,209 |
|
|
|
2,603 |
|
|
|
22.6 |
% |
|
|
(15.1 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales volume by
unit- TCMD products |
|
|
17,206,150 |
|
|
|
15,652,999 |
|
|
|
17,766,549 |
|
|
|
9.9 |
% |
|
|
(11.9 |
)% |
| Sales
volume by unit- third party products |
|
|
8,364,391 |
|
|
|
8,763,577 |
|
|
|
7,734,333 |
|
|
|
(4.6 |
)% |
|
|
13.3 |
% |
| Total
sales volume |
|
|
25,570,541 |
|
|
|
24,416,576 |
|
|
|
25,500,882 |
|
|
|
4.7 |
% |
|
|
(4.3 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average
selling price per unit- TCMD products |
|
$ |
1.72 |
|
|
$ |
1.17 |
|
|
$ |
1.18 |
|
|
|
46.3 |
% |
|
|
(0.5 |
)% |
| Average
selling price per unit- Third-party products |
|
$ |
2.20 |
|
|
$ |
1.41 |
|
|
$ |
1.59 |
|
|
|
79.6 |
% |
|
|
(11.5 |
)% |
Revenues from sales of TCMD products manufactured by us accounted
for 61.6%, 59.8% and 62.9% of our total revenues for the fiscal
years ended September 30, 2021, 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 increased by 1,553,151 units, or
9.9%, from 15,652,999 units sold in fiscal year 2020 to 17,206,150
units sold in fiscal year 2021. The number of customers purchasing
our products increased by 22.6%, from 2,209 customers in fiscal
year 2020 to 2,708 customers in fiscal year 2021. The increase in
the number of customers in fiscal year 2021 led to an increased
number of customer orders for our products, resulting in increased
sales volume of our TCMD products. Among the increase in total
sales volume of 1,553,151 units, most of such increase related to
our cold and flu medications because of strong market demand. The
average selling price of our TCMD products increased by 46.3%, from
$1.17 per unit in fiscal year 2020 to $1.72 per unit in fiscal year
2021, because we increased selling prices of our TCMD products in
response to increased raw material costs and general inflation.
These factors led to an increase in our revenue from sales of our
TCMD products from fiscal year 2020 to fiscal year 2021.
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. 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, 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 selling self-manufactured TCMD products, 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 38.4%,
40.2% and 37.1% of our total revenues for the fiscal years ended
September 30, 2021, 2020 and 2019, respectively.
Sales volume of third-party products decreased by 399,186 units, or
4.6%, from 8,763,577 units sold in fiscal year 2020 to 8,364,391
units sold in fiscal year 2021, because we put more efforts in
promoting the sales of our TCMD products in fiscal year 2021. The
average selling price of third-party products increased by 79.6%,
from $1.41 per unit in fiscal year 2020 to $2.20 per unit in fiscal
year 2021, due to increased purchase costs of third-party products,
as affected by the COVID-19 pandemic and general inflation, and the
changes in product mix based on customer orders.
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 pandemic, we
increased our purchase of third party products to fulfill our sales
orders in fiscal year 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 outpace the
sales of our own TCMD products going forward.
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, 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. Our cost of revenues
accounted for 47.2%, 54.1% and 59.7% of our total revenue for the
fiscal year 2021, 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 52.8%, 45.9% and 40.3% for the years ended
September 30, 2021, 2020 and 2019, respectively. Our gross profit
and gross margin are affected by the different product mix of those
products sold 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. 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 6.2%, 5.1% and 4.8% of our total revenue for
the years ended September 30, 2021, 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, especially when our capitalized
advertising costs will be expensed in subsequent period and when we
continue to expand our business and promote our products to
customers located at extended geographic areas.
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 6.9%, 5.5% and
4.4% of our revenue for the years ended September 30, 2021, 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 became a public
company in March 2021 when we completed the IPO.
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 11.4%, 1.9% and 1.9% of our revenue for
the years ended September 30, 2021, 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 sets forth a summary of our consolidated
results of operations for the periods presented, both in absolute
amount and as a percentage of our total operating revenue for the
years presented. This information should be read together with our
consolidated financial statements and related notes included
elsewhere in this annual report. The results of operations in any
period are not necessarily indicative of our future trends.
Year ended September 30, 2021 compared to year ended
September 30, 2020
|
|
|
For the years ended September 30, |
|
|
|
|
2021 |
|
|
2020 |
|
|
Variance |
|
|
|
|
Amount |
|
|
% of revenue |
|
|
Amount |
|
|
% of revenue |
|
|
Amount |
|
|
% |
|
|
REVENUE |
|
$ |
47,982,031 |
|
|
|
100.0 |
% |
|
$ |
30,703,960 |
|
|
|
100.0 |
% |
|
$ |
17,278,071 |
|
|
|
56.3 |
% |
|
COST OF REVENUE |
|
|
22,655,854 |
|
|
|
47.2 |
% |
|
|
16,610,140 |
|
|
|
54.1 |
% |
|
|
6,045,714 |
|
|
|
36.4 |
% |
|
GROSS PROFIT |
|
|
25,326,177 |
|
|
|
52.8 |
% |
|
|
14,093,820 |
|
|
|
45.9 |
% |
|
|
11,232,357 |
|
|
|
79.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
|
2,973,531 |
|
|
|
6.2 |
% |
|
|
1,555,546 |
|
|
|
5.1 |
% |
|
|
1,417,985 |
|
|
|
91.2 |
% |
|
General and administrative expenses |
|
|
3,296,844 |
|
|
|
6.9 |
% |
|
|
1,703,424 |
|
|
|
5.5 |
% |
|
|
1,593,420 |
|
|
|
93.5 |
% |
|
Research and development expenses |
|
|
5,465,662 |
|
|
|
11.4 |
% |
|
|
583,125 |
|
|
|
1.9 |
% |
|
|
4,882,538 |
|
|
|
837.3 |
% |
|
Total operating expenses |
|
|
11,736,037 |
|
|
|
24.5 |
% |
|
|
3,842,095 |
|
|
|
12.5 |
% |
|
|
7,893,942 |
|
|
|
205.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
13,590,140 |
|
|
|
28.3 |
% |
|
|
10,251,725 |
|
|
|
33.4 |
% |
|
|
3,338,415 |
|
|
|
32.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(101,604 |
) |
|
|
(0.2) |
% |
|
|
(123,760 |
) |
|
|
(0.4) |
% |
|
|
22,156 |
|
|
|
(17.9) |
% |
|
Other income, net |
|
|
(80,434 |
) |
|
|
(0.1) |
% |
|
|
(49,352 |
) |
|
|
(0.2) |
% |
|
|
(9,594 |
) |
|
|
19.4 |
% |
|
Income from short-term investments |
|
|
239,549 |
|
|
|
0.5 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
239,549 |
|
|
|
100.0 |
% |
|
Equity investment income |
|
|
30,827 |
|
|
|
0.1 |
% |
|
|
21,820 |
|
|
|
0.1 |
% |
|
|
9,007 |
|
|
|
41.3 |
% |
|
Total other expense, net |
|
|
88,338 |
|
|
|
0.2 |
% |
|
|
(151,292 |
) |
|
|
(0.5) |
% |
|
|
239,630 |
|
|
|
(158.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX |
|
|
13,678,478 |
|
|
|
28.5 |
% |
|
|
10,100,433 |
|
|
|
32.9 |
% |
|
|
3,578,045 |
|
|
|
35.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES |
|
|
2,358,526 |
|
|
|
4.9 |
% |
|
|
2,542,211 |
|
|
|
8.3 |
% |
|
|
(183,685 |
) |
|
|
(7.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
11,319,952 |
|
|
|
23.6 |
% |
|
$ |
7,558,222 |
|
|
|
24.6 |
% |
|
$ |
3,761,730 |
|
|
|
49.8 |
% |
Revenue: Our total revenues increased by $17,278,071, or
56.3%, to $47,982,031 for the year ended September 30, 2021 from
$30,703,960 for the year ended September 30, 2020. The increase in
our revenues was attributable to (i) an increased number of
customers by 22.6%, from 2,209 customers in fiscal year 2020 to
2,708 customers in fiscal year 2021; (ii) increased sales volume of
our TCMD products by 9.9%, from 15,652,999 units sold in fiscal
year 2020 to 17,206,150 units sold in fiscal year 2021; (iii)
increased average selling price of our TCMD products by 46.3% and
increased average selling price of third-party products by 79.6%,
in response to increased raw material costs and third-party
products purchase costs as affected by the COVID-19 pandemic and
general inflation; and (vi) an appreciation of RMB against U.S.
dollars in fiscal year 2021, with the average exchange rate between
RMB and US$ being US$1.00 to RMB 7.0077 in fiscal year 2020, as
compared to that of US$1.00 to RMB 6.5104 in fiscal year 2021. The
appreciation of RMB against US$ had a 7.1% positive impact on our
reported total revenues.
| |
|
For the Years Ended September 30, |
|
| |
|
2021 |
|
|
2020 |
|
|
Change |
|
| |
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
% |
|
| Revenue from sales of
self-manufactured TCMD products |
|
$ |
29,559,286 |
|
|
$ |
18,374,751 |
|
|
$ |
11,184,535 |
|
|
|
60.9 |
% |
| Revenue from
sales of third-party products |
|
|
18,422,745 |
|
|
|
12,329,209 |
|
|
|
6,093,536 |
|
|
|
49.4 |
% |
| Total
revenue |
|
$ |
47,982,031 |
|
|
$ |
30,703,960 |
|
|
$ |
17,278,071 |
|
|
|
56.3 |
% |
Revenue from sales of our TCMD products
Sales of our TCMD products increased by $11,184,535, or 60.9%, from
$18,374,751 in fiscal year 2020 to $29,559,286 in fiscal year 2021,
because the sales volume of our TCMD products increased by 9.9%
from 15,652,999 units sold in fiscal year 2020 to 17,206,150 units
sold in fiscal year 2021, and the average selling price of our TCMD
products increased by 46.3% from $1.17 per unit in fiscal year 2020
to $1.72 per unit in fiscal year 2021. The increase 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 key Chronic Condition Treatment
products, accounted for 40.3% and 38.2% of our total revenue in
fiscal year 2021 and 2020, respectively. The sales of Guben Yanling
Pill increased by $6,702,397, or 494,932 units from fiscal year
2020 to fiscal year 2021. |
|
b) |
The
number of customers purchasing our products increased by 22.6%,
from 2,209 customers in fiscal year 2020 to 2,708 customers in
fiscal year 2021. The increase in the number of customers led to an
increase in the number of customer orders for our products,
resulting increased sales volume of our TCMD products. |
|
c) |
Sales
of our flu and cold medication products (including Qiangli Pipa
Syrup and Paracetanol Granule For Children) increased in fiscal
year 2021 due to strong market demand. Sales volume of our Qiangli
Pipa Syrup and Paracetanol Granule For Children increased by
964,266 units and 1,297,349 units, respectively, in fiscal year
2021 as compared to fiscal year 2020. On the other hand, as
affected by inflation and increased market prices of raw materials,
we adjusted our selling prices and the average selling price of our
Qiangli Pipa Syrup, Isatis Root Granule and Paracetanol Granule For
Children increased by $0.20 per unit, $0.22 per unit and $0.09 per
unit, or 41.5%, 34.8% and 32.5%, respectively, in fiscal year 2021
compared to fiscal year 2020. |
|
d) |
The
average exchange rate between RMB and US$ was US$1.00 to RMB 7.0077
in fiscal year 2020 as compared to an average rate of US$1.00 to
RMB 6.5104 in fiscal year 2021. The appreciation of RMB against US$
had a 7.1% positive impact on our reported total
revenues. |
Revenue from sales of third-party products
Sales of third-party products increased by $6,093,536, or 49.4%,
from $12,329,209 in fiscal year 2020 to $18,422,745 in fiscal year
2021. Sales volume of third-party products slightly decreased by
4.6%, from 8,763,577 units sold in 2020 to 8,364,391 units sold in
2021. In 2021, 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 2021 was higher than in
fiscal year 2020. Our average selling price of third-party products
increased by 79.6%, from $1.41 per unit in fiscal year 2020 to
$2.20 per unit in fiscal year 2021. Among the total sales of
third-party products, sales of biochemical drugs increased by
44.7%, or $4,968,438, from $10,325,411 in fiscal year 2020 to
$16,082,546 in fiscal year 2021, because of a 51.7% increase in
average selling price, while changes in sales of traditional
Chinese medicine pieces, medical instruments, and dietary
supplements from fiscal year 2020 to fiscal year 2021 were
relatively immaterial. In addition, the average exchange rate
between RMB and US$ was US$1.00 to RMB 7.0077 in fiscal year 2020,
as compared to an average rate of US$1.00 to RMB 6.5095 in fiscal
year 2021. The appreciation of RMB against US$ had a 7.1% positive
impact on our reported revenue from sales of third-party
products.
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, |
|
| |
|
2021 |
|
|
2020 |
|
|
Change |
|
| |
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of revenue- TCMD
products |
|
$ |
11,162,847 |
|
|
$ |
8,581,939 |
|
|
$ |
2,580,908 |
|
|
|
30.1 |
% |
| Cost of
revenue- third-party products |
|
|
11,493,007 |
|
|
|
8,028,200 |
|
|
|
3,464,807 |
|
|
|
43.2 |
% |
| Total cost of
revenue |
|
$ |
22,655,854 |
|
|
$ |
16,610,140 |
|
|
$ |
6,045,714 |
|
|
|
36.4 |
% |
Our cost of revenues increased by $6,045,714, or 36.4%, from
$16,610,140 in fiscal year 2020 to $22,655,854 in fiscal year 2021.
The increase in our cost of revenues was primarily due to increased
sales volume, increased raw material and third-party product
purchase costs, and a 7.1% exchange rate impact as discussed in
more details below.
Cost of revenues of TCMD products
Cost of revenues of TCMD products accounted for 49.3% and 51.7% of
our total costs of revenues for the years ended September 30, 2021
and 2020, respectively. Cost of revenues of TCMD products increased
by $2,580,908, or 30.1%, from $8,581,939 in fiscal year 2020 to
$11,162,847 in fiscal year 2021. The increase in cost of revenues
of our TCMD products was due to the following reasons:
|
(1) |
The
sales volume of TCMD products increased by 9.9%, from 15,652,999
units sold in fiscal year 2020 to 17,206,150 units sold in fiscal
year 2021. As sales volume increased in fiscal year 2021, raw
materials, labor, packaging, freight and overhead costs associated
with our TCMD product sales also increased. |
|
(2) |
As a
result of inflation and increased market prices of raw materials,
the average per unit cost of our TCMD products increased by $0.10,
or 9.9%, from $0.55 per unit in fiscal year 2020 to $0.65 per unit
in fiscal year 2021. Among the 13 varieties of TCMD products, cost
of revenues of Guben Yanling Pill, one of our key products,
accounted for 23.3% and 22.7% of our total cost of revenues in
fiscal years 2021 and 2020, respectively. Costs of Guben Yanling
Pill increased by $1,229,987 in fiscal year 2021 as compared to
fiscal year 2022, when sales volume of Guben Yanling Pill increased
by 12.1%. In addition, unit production cost of Qiangli Pipa Syrup
and Paracetamol Granule for Children increased by 43.2% and 51.4%,
respectively, in fiscal year 2021 as compared to fiscal year 2022,
due to increased raw material costs, which led to corresponding
increases in cost of revenues associated with these TCMD products,
by $610,916 and $451,504, respectively. |
|
(3) |
The average exchange rate between
RMB and US$ was US$1.00 to RMB 7.0077 in fiscal year 2020 as
compared to an average rate of US$1.00 to RMB 6.5104 in fiscal year
2021. |
The appreciation of RMB against US$ had a 7.1% positive impact on
our cost of revenues from sales of TCMD products. The
increase in our cost of revenues of our TCMD products in fiscal
year 2021 as compared to fiscal year 2020 reflected the
above-mentioned factors combined.
Cost of revenues of third-party products
Cost of revenues of third-party products accounted for 50.7% and
48.2% of our total costs of revenues for the years ended September
30,2021 and 2020, respectively. Cost of revenues of third-party
products increased by $3,464,807, or 43.2%, from $8,028,200 in
fiscal year 2020 to $11,493,007 in 2021, because of an increase in
average unit cost of third-party products by $0.79 per unit, or
79.6%, from $1.41 per unit in 2020 to $2.20 per unit in fiscal year
2021, offset by a decrease in sales volume of third-party products
by 4.6%. In fiscal year 2021, due to an overall increase in the
market prices of raw materials used in the manufacturing of
third-party products, we sourced third-party products at higher
prices from third-party pharmaceutical companies. In addition, the
average exchange rate between RMB and US$ was US$1.00 to RMB 7.0077
in fiscal year 2020 as compared to an average rate of US$1.00 to
RMB 6.5104 in fiscal year 2021. The appreciation of RMB against US$
had a 7.1% positive impact on our cost of revenues from sales of
third-party products. These factors led to the increase in cost of
revenues associated with third-party product sales in fiscal year
2021 as compared to fiscal year 2020.
Gross profit
Our gross profit increased by $11,232,356, from $14,093,821 in
fiscal year 2020 to $25,326,177 in fiscal year 2021. Our gross
margin increased by 6.9% from 45.9% in fiscal year 2020 to 52.8% in
fiscal year 2021.
| |
|
For the years ended September 30, |
|
| |
|
2021 |
|
|
2020 |
|
|
Change |
|
| |
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit- TCMD
products |
|
$ |
18,396,439 |
|
|
$ |
9,792,811 |
|
|
$ |
8,603,627 |
|
|
|
87.9 |
% |
| Gross profit-
third-party products |
|
|
6,929,738 |
|
|
|
4,301,009 |
|
|
|
2,628,729 |
|
|
|
61.1 |
% |
| Total gross
profit |
|
$ |
25,326,177 |
|
|
$ |
14,093,820 |
|
|
$ |
11,232,356 |
|
|
|
79.7 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin- TCMD products |
|
|
62.2 |
% |
|
|
53.3 |
% |
|
|
|
|
|
|
8.9 |
% |
| Gross margin-
third party products |
|
|
37.6 |
% |
|
|
34.9 |
% |
|
|
|
|
|
|
2.7 |
% |
| Total gross
margin |
|
|
52.8 |
% |
|
|
45.9 |
% |
|
|
|
|
|
|
6.9 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average selling price per unit-
TCMD products |
|
$ |
1.72 |
|
|
$ |
1.17 |
|
|
$ |
0.54 |
|
|
|
46.3 |
% |
| Average cost
per unit- TCMD products |
|
$ |
0.65 |
|
|
$ |
0.55 |
|
|
$ |
0.10 |
|
|
|
18.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average selling
price per unit- third party products |
|
$ |
2.20 |
|
|
$ |
1.41 |
|
|
$ |
0.80 |
|
|
|
56.6 |
% |
| Average cost
per unit - third party products |
|
$ |
1.38 |
|
|
$ |
0.92 |
|
|
$ |
0.46 |
|
|
|
50.6 |
% |
Gross profit from the sales of our TCMD products increased by
$8,603,627, or 87.9%, from $9,792,811 in 2020 to $18,396,439 in
2021, and the gross margin of our TCMD products increased by 8.9%,
from 53.3% in 2020 to 62.2% in 2021. The increase in our gross
profit from the sales of TCMD products was due to the following
reasons: (i) as discussed above, the sales volume of our TCMD
products increased by 9.9%, from 15,652,999 units sold in fiscal
year 2020 to 17,206,150 units sold in fiscal year 2021, and the
average selling price of our TCMD products increased by 46.3% from
$1.17 per unit in fiscal year 2020 to $1.72 per unit in fiscal year
2021. Although inflation and increased market prices of raw
materials led to an increase in the average cost of our TCMD
products by 18.6%, the increase in the average selling price
outpaced the increase in average unit costs of our TCMD products by
$0.44 per unit, which increased our profitability from sales of
TCMD products; (ii) our gross profit and gross margin were affected
by the different product mix of the products sold during each
reporting period. During fiscal year 2021, more higher-margin and
lower-cost TCMD products were sold as compared to fiscal year 2020;
and (iii) the appreciation of RMB against US$ had a 7.1% positive
impact on our gross profit from sales of TCMD products.
Gross profit from third-party product sales increased by
$2,628,729, or 61.1%, from $4,301,009 in fiscal year 2020 to
$6,929,738 in fiscal year 2021, while the gross margin of
third-party product sales increased by 2.7%, from 34.9% in fiscal
year 2020 to 37.6% in fiscal year 2021. The average unit selling
price of third-party products increased by 56.6%, or $0.80 per
unit, while average unit cost of third-party products also
increased by 50.6%, or $0.46 per unit. The increase in the average
selling price outpaced the increase in average unit cost of
third-party products by $0.34 per unit. The increase in our gross
profit from third-party products was affected by changes in the
product mix of the products sold in fiscal year 2021 as compared to
fiscal year 2020.
Operating expenses
The following table sets forth the breakdown of our operating
expenses for fiscal years 2021 and 2020:
| |
|
For the years ended September 30, |
|
| |
|
2021 |
|
|
2020 |
|
|
Variance |
|
| |
|
Amount |
|
|
% of
revenue |
|
|
Amount |
|
|
% of
revenue |
|
|
Amount |
|
|
% |
|
| Total
revenue |
|
$ |
47,982,031 |
|
|
|
100.0 |
% |
|
$ |
30,703,960 |
|
|
|
100.0 |
% |
|
$ |
17,278,071 |
|
|
|
56.3 |
% |
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Selling expenses |
|
|
2,973,531 |
|
|
|
6.2 |
% |
|
|
1,555,546 |
|
|
|
5.1 |
% |
|
|
1,417,985 |
|
|
|
91.2 |
% |
|
General and administrative expenses |
|
|
3,296,844 |
|
|
|
6.9 |
% |
|
|
1,703,424 |
|
|
|
5.5 |
% |
|
|
1,593,420 |
|
|
|
93.5 |
% |
| Research and
development expenses |
|
|
5,465,662 |
|
|
|
11.4 |
% |
|
|
583,125 |
|
|
|
1.9 |
% |
|
|
4,882,537 |
|
|
|
837.3 |
% |
| Total
operating expenses |
|
$ |
11,736,037 |
|
|
|
24.5 |
% |
|
$ |
3,842,095 |
|
|
|
12.5 |
% |
|
$ |
7,893,942 |
|
|
|
205.5 |
% |
Selling expenses
Our selling expenses primarily include salaries and welfare benefit
expenses paid to our sales personnel, advertising expenses to
increase our brand awareness, shipping and delivery expenses,
expenses incurred for our business travel, meals and other sales
promotion and marketing activities related expenses.
|
|
|
For the years ended September 30, |
|
|
|
|
2021 |
|
|
2020 |
|
|
Variance |
|
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefit expenses |
|
$ |
859,436 |
|
|
|
28.9 |
% |
|
$ |
586,632 |
|
|
|
37.7 |
% |
|
$ |
272,804 |
|
|
|
46.5 |
% |
|
Advertising expenses |
|
|
1,316,654 |
|
|
|
44.3 |
% |
|
|
343,962 |
|
|
|
22.1 |
% |
|
|
972,692 |
|
|
|
282.8 |
% |
|
Shipping and delivery expenses |
|
|
701,997 |
|
|
|
23.6 |
% |
|
|
576,796 |
|
|
|
37.1 |
% |
|
|
125,201 |
|
|
|
21.7 |
% |
|
Business travel and meals expenses |
|
|
78,565 |
|
|
|
2.6 |
% |
|
|
31,410 |
|
|
|
2.0 |
% |
|
|
47,155 |
|
|
|
150.1 |
% |
|
Other sales promotion related expenses |
|
|
16,879 |
|
|
|
0.6 |
% |
|
|
16,746 |
|
|
|
1.1 |
% |
|
|
133 |
|
|
|
0.8 |
% |
|
Total selling expenses |
|
$ |
2,973,531 |
|
|
|
100.0 |
% |
|
$ |
1,555,546 |
|
|
|
100.0 |
% |
|
$ |
1,417,985 |
|
|
|
91.2 |
% |
Our selling expenses increased by $1,417,985, or 91.2%, from
$1,555,546 in fiscal year 2020 to $2,973,531 in fiscal year 2021,
primarily attributable to (i) an increase in advertising expenses
by $972,692, or 282.8%, from $343,962 in fiscal year 2020 to
$1,316,654 in fiscal year 2021. In fiscal year 2020, we used
outdoor billboards, magazines and social media such as WeChat and
Weibo to advertise our brand and products in order to increase
customer awareness. In fiscal year 2021, in connection with the
sales and promotion of our TCMD products to targeted customers, we
engaged a local advertising agency to develop and produce a TV
advertisement for promoting the sales of our major TCMD products,
Bai Nian Dan and Guben Yanling Pill, and coordinate with a TV
channel to broadcast the advertisement to targeted geographic
market areas. As a result of our advertising efforts in fiscal year
2021, we spent more on advertising than we did in fiscal year 2020,
which led to higher advertising expenses in fiscal year 2021. In
addition, we expect that our capitalized advertising costs will be
expensed, and increase our future advertising expenses in
subsequent period, starting from when the advertisement was first
broadcasted; (ii) an increase in salary and benefit expenses paid
to our sales employees by $272,804, or 46.5%, from $586,632 in
fiscal year 2020 to $859,436 in fiscal year 2021, and an increase
in business travel and meals expense by $47,155 or 150.1%, from
$31,410 in fiscal year 2020 to $78,565 in fiscal year 2021,
primarily due to our increased sales activities in fiscal year
2021; and (iii) an increase in shipping and delivery expenses by
$125,201, or 21.7%, from $576,796 in fiscal year 2020 to $701,997
in fiscal year 2021, due to our increased sales volume and an
increase in the number of sales orders fulfilled in fiscal year
2021. These above-mentioned factors combined led to the increase in
our selling expenses in fiscal year 2021 as compared to fiscal year
2020. As a percentage of revenues, our selling expenses accounted
for 6.2% and 5.1% of our total revenue for the years ended
September 30, 2021 and 2020, 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, |
|
|
|
|
2021 |
|
|
2020 |
|
|
Variance |
|
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefit expense |
|
$ |
657,543 |
|
|
|
19.9 |
% |
|
$ |
464,530 |
|
|
|
27.3 |
% |
|
$ |
193,013 |
|
|
|
41.6 |
% |
|
Depreciation and amortization |
|
|
172,453 |
|
|
|
5.2 |
% |
|
|
188,670 |
|
|
|
11.1 |
% |
|
|
(16,217 |
) |
|
|
(8.6) |
% |
|
Bad debt reserve expenses (recovery) |
|
|
(230,175 |
) |
|
|
(7.0) |
% |
|
|
98,101 |
|
|
|
5.8 |
% |
|
|
(328,276 |
) |
|
|
(334.6) |
% |
|
Land and property tax |
|
|
104,451 |
|
|
|
3.2 |
% |
|
|
97,039 |
|
|
|
5.7 |
% |
|
|
7,412 |
|
|
|
7.6 |
% |
|
Office supply and utility expense |
|
|
376,204 |
|
|
|
11.4 |
% |
|
|
115,891 |
|
|
|
6.8 |
% |
|
|
260,313 |
|
|
|
224.6 |
% |
|
Transportation, business travel and meals expense |
|
|
68,047 |
|
|
|
2.1 |
% |
|
|
42,151 |
|
|
|
2.5 |
% |
|
|
25,896 |
|
|
|
61.4 |
% |
|
Consulting fee |
|
|
1,967,858 |
|
|
|
59.7 |
% |
|
|
616,982 |
|
|
|
36.2 |
% |
|
|
1,350,876 |
|
|
|
218.9 |
% |
|
Inspection and maintenance fee |
|
|
60,939 |
|
|
|
1.8 |
% |
|
|
21,825 |
|
|
|
1.3 |
% |
|
|
39,114 |
|
|
|
179.2 |
% |
|
Stamp tax and other expenses |
|
|
119,524 |
|
|
|
3.6 |
% |
|
|
58,235 |
|
|
|
3.4 |
% |
|
|
61,289 |
|
|
|
105.2 |
% |
|
Total general and administrative expenses |
|
$ |
3,296,844 |
|
|
|
100.0 |
% |
|
$ |
1,703,424 |
|
|
|
100.0 |
% |
|
$ |
1,593,420 |
|
|
|
93.5 |
% |
Our general and administrative expenses increased by $1,593,420 or
93.5% from $1,703,424 in fiscal year 2020 to $3,296,844 in fiscal
year 2021, primarily attributable to (i) an increase in our
professional service fees by $1,350,876 in fiscal year 2021 as
compared to fiscal year 2020, primarily due to increased audit
fees, legal fees, business consulting fees in connection with our
public offering; (ii) an increase in our office supply and utility
expenses by $260,313, or 224.6%, to support our administration
activities; and (iii) an increase in our salaries, welfare expenses
and insurance expenses paid to administration employees by
$193,013, or 41.6%, because higher amount of annual bonus was
distributed to administrative staffs in fiscal year 2021 as
compared to fiscal year 2020, offset by a decrease in bad debt
expense by $328,276 because we accrued more bad debt expenses in
fiscal year 2020 based on estimated accounts receivable collection
trend, and approximately $0.2 million bad debt accrual in prior
periods was collected in fiscal year 2021, which led to a bad debt
recovery in 2021. The overall increase in our general and
administrative expenses in fiscal year 2021 as compared to fiscal
year 2020 reflected the above-mentioned factors combined. As a
percentage of revenues, general and administrative expenses were
6.9% and 5.5% of our revenue in fiscal years 2021 and 2020,
respectively.
Research and development expenses
Our research and development expenses primarily consist of
salaries, welfare and insurance expenses paid to our employees
involved in the research and development activities, materials and
supplies used in the development and testing new TCMD products,
depreciation and other miscellaneous expenses.
|
|
|
For the years ended September 30, |
|
|
|
|
2021 |
|
|
2020 |
|
|
Variance |
|
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefit expenses to R&D staff |
|
$ |
155,940 |
|
|
|
2.9 |
% |
|
$ |
97,444 |
|
|
|
16.7 |
% |
|
$ |
58,496 |
|
|
|
60.0 |
% |
|
Materials used in R&D activities |
|
|
836,710 |
|
|
|
15.3 |
% |
|
|
469,788 |
|
|
|
80.6 |
% |
|
|
366,922 |
|
|
|
78.1 |
% |
|
Expenditure on new product development |
|
|
4,454,400 |
|
|
|
81.5 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
4,454,400 |
|
|
|
100.0 |
% |
|
Depreciation and others |
|
|
18,612 |
|
|
|
0.3 |
% |
|
|
15,893 |
|
|
|
2.7 |
% |
|
|
2,719 |
|
|
|
17.1 |
% |
|
Total R&D expenses |
|
$ |
5,465,662 |
|
|
|
100.0 |
% |
|
$ |
583,125 |
|
|
|
100.0 |
% |
|
$ |
4,882,537 |
|
|
|
837.3 |
% |
Research and development expenses increased by $4,882,537, or
837.3%, from $583,125 in fiscal year 2020 to $5,465,662 in fiscal
year 2021, primarily attributable to (i) an increase in research
and development expense of $4,454,400 in order to develop and test
eight new Chinese medicine products in order to diversify our
future product portfolio. In fiscal year 2021, we entered into
several cooperative agreements with external academic and research
institutions to jointly conduct the new product development and
accordingly incurred significant amount of R&D expense in
connection with such efforts; and (ii) an increase in the materials
used in the research and development (“R&D”) activities by
$366,922. In fiscal year 2021, 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 2021
than in fiscal year 2020. As a percentage of revenues, research and
development expenses were 11.4% and 1.9% of our revenue in fiscal
years 2021 and 2020, respectively.
Other income (expenses), net
Our other income (expenses) primarily includes interest expenses
incurred on our short-term bank loans, gain or loss from disposal
of fixed assets, investment income from our long-term investment in
exchange for a 5% ownership interest in a local bank, and income
generated from our short-term investments to purchase wealth
management products from financial institutions. Total other
income, net, increased by $239,630 or 158.4%, from net other
expenses of $151,292 in fiscal year 2020 to net other income of
$88,338 in fiscal year 2021 due to the following reasons:
Interest expenses decreased by $22,156, or 17.9%, from $123,760 in
fiscal year 2020 to $101,604 in fiscal year 2021. The decrease in
our interest expenses was due to lower amount of outstanding loans
we carried during fiscal year 2021 as compared to fiscal year
2020.
Other expense increased by $31,082, from other expense of $49,352
in fiscal year 2020 to other expense of $80,434 in fiscal year
2021, primarily due to payment of work injury compensation to
workers in fiscal year 2021 and foreign currency transaction
loss.
Equity investment income was $30,827 and $21,820 in fiscal years
2021 and 2020, 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 this investment was
to earn investment income as JX RCB Bank continues to grow. We
account for this investment using the measurement alternative in
accordance with ASC 321. As of September 30, 2021 and 2020, the
value of this investment amounted to $744,924 and $735,000,
respectively, and was reported as long-term investment in equity
investee on our consolidated balance sheets.
Income from short-term investments increased from Nil in fiscal
year 2020 to $239,549 in fiscal year 2021. Our
short-term investments consist of wealth management financial
products purchased from a financial institution, which can be
redeemed anytime at our discretion. The financial institution put
our investments in certain financial instruments, including money
market funds and bonds, to generate investment income. In fiscal
year 2021, we used available cash to purchase such wealth
management financial products from financial institution and
generated $239,549 investment income in fiscal year 2021. There was
no such income in fiscal year 2020.
Provision for Income Taxes
Our provision for income taxes was $2,358,526 in fiscal year 2021,
a decrease of $183,685, from $2,542,211 in fiscal year 2020. Under
the Enterprise Income Tax Law, or the EIT Law, domestic enterprises
and foreign investment enterprises are usually subject to a unified
25% enterprise income tax rate while preferential tax rates, tax
holidays and even tax exemption may be granted on a case-by-case
basis. The EIT Law grants preferential tax treatment to High and
New Technology Enterprises (“HNTEs”, individually an “HNTE”). 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 fiscal years 2021 and 2020 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, a wholly owned subsidiary of Jiangxi Universe, is subject to
a standard 25% income tax rate. The impact of the tax holidays
noted above decreased PRC corporate income taxes by $1,518,979 and
$118,986 for the years ended September 30, 2021, and 2020,
respectively. The benefit of the tax holidays on net income per
share (basic and diluted) $0.09 and $0.01 for the years ended
September 30, 2021 and 2020, respectively.
Net Income
As a result of the foregoing, we reported a net income of
$11,319,952 in fiscal year 2021, representing a $3,761,730 increase
from a net income of $7,558,222 in fiscal year 2020.
Year ended September 30, 2020 compared to year ended
September 30, 2019
| |
|
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 |
% |
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 was 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 pandemic, 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
$1.41 per unit in fiscal year 2020; and (vi) the average exchange
rate between RMB and US$ was US$1.00 to RMB 6.8729 in fiscal year
2019 as compared to the average rate of US$1.00 to RMB 7.0077 in
fiscal year 2020. The depreciation of RMB against US$ 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.
These factors all contributed to the decrease in our revenues by
7.6% from fiscal year 2019 to fiscal year 2020.
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.
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 the selling prices of our products 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 pandemic. 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.
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 a 17.1% increase in
sales volume, while sales of TCMPs, medical instruments and dietary
supplements decreased by $95,311, $718,184 and $7,665,
respectively, 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 pandemic, 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,
TCMPs 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 the COVID-19 pandemic. In addition, as a result
of strong market competition, sales of our flu and cold medication
products decreased significantly. Also, the 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 the 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 the 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) |
The
average exchange rate between RMB and U.S. dollars was US$1.00 to
RMB 6.8729 in fiscal year 2019 as compared to an average rate of
US$1.00 to RMB 7.0077 in fiscal year 2020. The depreciation of RMB
against U.S. dollars had a 2.0% negative impact on our reported
cost of revenues. |
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 years 2020 and 2019,
respectively. Cost of revenues of TCMD products decreased by
$3,312,177, or 27.8%, from $11,894,117 in fiscal year 2019 to
$8,581,940 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, the 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 products, accounted for 22.7% and 24.3% of our total
cost of revenues in fiscal years 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
and Isatis Root Granule was also due to decreased sales volume by
44.2% and 18.1%, respectively, due to strong market competition of
flu and cold medication products as discussed above. |
| |
(3) |
An average exchange rate between RMB and U.S. dollars and the
depreciation 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 the 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 years 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, the average exchange rate
between RMB and U.S. dollars in fiscal year 2020 and the
depreciation 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.
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 different product mix of the products sold 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:
|
(a) |
Although revenue and sales volume
of our TCMD products decreased by 12.1% and 11.9%, respectively, as
affected by the COVID-19 pandemic as well as 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. |
|
(b) |
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. The average unit selling price of
third-party products decreased by 11.5%, or $0.18 per unit, while
the average unit cost of third-party products decreased by 11.1%,
or $0.11 per unit. The decrease in the average selling price
outpaced the decrease in the average unit cost of third-party
products by $0.07 per unit. Due to the COVID-19 pandemic, 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, the largest portion of decrease in
gross profit from third-party products was associated with medical
instrument products, which decreased by $304,160 when the average
unit purchase cost increased by 3.3%, or $0.09 per unit when
comparing fiscal year 2020 to fiscal year 2019. Higher purchase
prices of 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 prices to promote the products to
customers. 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.
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 and 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 |
)% |
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 used 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 pandemic. During the one-month
temporary closure of our facilities in response to the COVID-19
outbreak, we reduced business travels and we only paid basic salary
to our sales personnel during this period of time; and (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 pandemic, 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) an increase in our
professional service fees 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 IPO, and (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
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.
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 Jiangxi
Luling Rural Commercial Bank (“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 we paid RMB330,000 (US$49,252) as 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 JX RCB Bank in exchange for a 5% ownership interest in
the bank. The purpose of this investment was to earn investment
income as JX RCB 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.
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.
B. Liquidity and Capital
Resources
On March 25, 2021, we closed our IPO of 5,000,000 ordinary shares,
par value $0.003125 per share at a public offering price of $5.00
per share. On March 29, 2021, the underwriter exercised in full its
over-allotment option to purchase an additional 750,000 ordinary
shares. The closing for the sale of the over-allotment
shares took place on March 31, 2021. Gross proceeds of our IPO,
including the proceeds from the sale of the over-allotment shares,
totaled $28.75 million, before deducting underwriting discounts and
other related expenses. Net proceeds of our IPO, including
over-allotment shares, were approximately $25.6 million. In
connection with the IPO, our ordinary shares began trading on the
Nasdaq Global Market under the symbol “UPC” on March 23,
2021.
As of September 30, 2021, we had $8,077,908 in cash on hand. We
also had short-term investments of $13.7 million in wealth
management financial products from financial institutions to
generate investment income, which we purchased with the proceeds
from the IPO proceeds. Such short-term investment can be redeemed
anytime at our discretion and is highly liquid. As of September 30,
2021, we also had $15,573,742 in accounts receivable. Our accounts
receivable primarily include balance due from customers for our
pharmaceutical products sold and delivered to customers. No single
customer accounts for more than 10% of our total accounts
receivable balance as of September 30, 2021. Approximately 75.4%,
or $11.7 million, of our net accounts receivable balance as of
September 30, 2021 had been subsequently collected during the
period from October 2021 to December 31, 2021. Collected accounts
receivable will be used as working capital in our operations, if
necessary.
The following table summarizes our accounts receivable and
subsequent collection by aging bucket:
|
Accounts Receivable by aging bucket |
|
Balance as of
September 30,
2021 |
|
|
Subsequent
collection |
|
|
% of
subsequent
collection |
|
| Less than 3 months |
|
$ |
11,587,490 |
|
|
$ |
7,991,589 |
|
|
|
69.0 |
% |
| From 4 to 6 months |
|
|
3,922,226 |
|
|
|
3,541,960 |
|
|
|
90.3 |
% |
| From 7 to 9 months |
|
|
356,267 |
|
|
|
199,853 |
|
|
|
56.1 |
% |
| From 10 to 12 months |
|
|
66,124 |
|
|
|
5,193 |
|
|
|
7.9 |
% |
| Over 1
year |
|
|
88,162 |
|
|
|
584 |
|
|
|
0.7 |
|
| Total gross accounts receivable |
|
|
16,020,269 |
|
|
|
11,739,179 |
|
|
|
73.3 |
% |
| Allowance for
doubtful accounts |
|
|
(446,527 |
) |
|
|
|
|
|
|
|
|
| Accounts
Receivable, net |
|
$ |
15,573,742 |
|
|
$ |
11,739,179 |
|
|
|
75.4 |
% |
As of September 30, 2021, our inventory balance amounted to
$2,462,542, 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 advance to suppliers balance of $2,738,313,
representing prepayment to our raw material suppliers to ensure
continuous supply of high-quality raw materials at favorable
purchase prices. As of the date of this annual report, 66.1% of the
advance to supplier balance has been realized when we received the
purchased raw materials from our suppliers.
As of September 30, 2021, we also had prepayment to an advertising
agency of $7.5 million. On September 6, 2021, we entered into an
advertising service agreement with a third party, Fengyang Legend,
pursuant to which, Fengyang Legend agreed to assist us in
developing and producing a TV advertisement for promoting the sales
of our major TCMD products, Bai Nian Dan and Guben Yanling Pill,
and coordinating with a TV channel to broadcast the advertisement
to targeted geographic market areas. The total advertising service
fee under this agreement is RMB55 million (approximately $8.5
million) with a service period of one year, from October 1, 2021 to
September 30, 2022. Pursuant to the terms under this agreement, we
made an advance payment in the amount of 30% of the total
advertising service fee to Fengyang Legend, and we will be required
to pay Fengyang Legend in the amount of 58% of the total
advertising service fee once the TV channel on which the
advertisement will be broadcasted is determined. As of September
30, 2021, a total of RMB48.4 million (approximately $7.5 million)
had been paid to Fengyang Legend and was recorded as prepayment for
advertising services on the balance sheets, which has been expensed
since the time when our TV advertisement was first broadcasted on
October 31, 2021.
During the fiscal year 2021, we also started to construct new
manufacturing facilities in order to expand our future production
capacity. On June 25, 2021, we entered into a construction contract
with a sub-contractor, Chenyuan, pursuant to which, Chenyuan will
construct four manufacturing plants and an office building with a
total estimated maximum budget of RMB165 million (approximately
$25.5 million). The construction work stated on August 8, 2021,
with an estimated completion date on August 7, 2023. As of
September 30, 2021, we had made prepayment of approximately RMB69.2
million (approximately $10.7 million) to Chenyuan to start the CIP
project, including land improvement, building foundation and the
construction of the manufacturing plants. As of September 30, 2021,
the $10.7 million prepayment to Chenyuan was recorded as prepayment
for CIP Project on the balance sheets. As of September 30, 2021,
future additional capital expenditure on this CIP Project was
estimated to be approximately RMB95.8 million (equivalent to $14.8
million), among which approximately $3.8 million is required for
the next 12 months ending September 30, 2022. We currently plan to
support our ongoing CIP Project through cash flows from operations,
proceeds received from the IPO, and borrowings from banks, if
necessary.
As of September 30, 2021, we also made a prepayment of $2,476,800
to a related party in order to purchase certain residential and
commercial property. On May 6, 2021, we entered into a real estate
property purchase agreement with a related party, Jiangxi Yueshang
Investment Co., Ltd. (“Jiangxi Yueshang”), an entity in which our
CEO, Mr. Gang Lai, owns 5% equity interest. Pursuant to this
purchase agreement, Jiangxi Yueshang will sell and we will purchase
certain residential apartments and commercial office space totaling
2,749.30 square meters, with a total purchase price of RMB32
million (approximately $4.95 million). Pursuant to this purchase
agreement, we were required to make a prepayment in the amount of
50% of the total purchase price, with 20% of the total purchase
price payable when certificate of occupancy is available to us, and
30% of the total purchase price payable upon delivery of the
property. As of September 30, 2021, we had made prepayment of RMB16
million ($2,476,800) to Jiangxi Yueshang. The remaining balance is
expected to be paid by August 2024.
As of September 30, 2021, we also had short-term bank loans of
$4,334,400 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 our past
experiences and our outstanding credit history. The balance of our
due to related parties was $19,723 as of September 30, 2021,
representing cash advances from our controlling shareholders to be
used as our working capital.
As of September 30, 2021, our working capital balance was
$39,270,636. 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 and proceeds received from the IPO will
be sufficient to meet our working capital needs in the next 12
months from the date the audited financial statements were
issued.
The following table sets forth summary of our cash flows for the
periods indicated:
| |
|
For the years ended September 30, |
|
| |
|
2021 |
|
|
2020 |
|
|
2019 |
|
| Net cash provided by (used
in) operating activities |
|
$ |
(2,055,847 |
) |
|
$ |
6,115,157 |
|
|
$ |
13,203,755 |
|
| Net cash used in investing
activities |
|
|
(27,059,958 |
) |
|
|
(51,798 |
) |
|
|
(86,033 |
) |
| Net cash used in financing
activities |
|
|
26,581,809 |
|
|
|
470,136 |
|
|
|
(16,003,857 |
) |
| Effect of exchange rate change on
cash |
|
|
553,702 |
|
|
|
347,386 |
|
|
|
(126,720 |
) |
| Net increase (decrease) in cash |
|
|
(1,980,294 |
) |
|
|
6,880,881 |
|
|
|
(3,012,855 |
) |
| Cash, beginning
of year |
|
|
10,058,202 |
|
|
|
3,177,321 |
|
|
|
6,190,176 |
|
| Cash, end of
year |
|
$ |
8,077,908 |
|
|
$ |
10,058,202 |
|
|
$ |