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EX-21 - WINNER MEDICAL GROUP INCv168276_ex21.htm
EX-32.2 - WINNER MEDICAL GROUP INCv168276_ex32-2.htm
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EX-32.1 - WINNER MEDICAL GROUP INCv168276_ex32-1.htm
EX-23.1 - WINNER MEDICAL GROUP INCv168276_ex23-1.htm
EX-31.1 - WINNER MEDICAL GROUP INCv168276_ex31-1.htm


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

 
FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2009
Or
o
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to

Commission file number: 000-16547
 

 
WINNER MEDICAL GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada
33-0215298
(State or other jurisdiction of incorporation or
(I.R.S. Employer
organization)
Identification No.)

Winner Industrial Park, Bulong Road
Longhua, Shenzhen City, 518109
People’s Republic of China
(Address of principal executive offices)

Registrant’s telephone number, including area code: (86) 755-28138888

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes      o      No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  o     No  x

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 x    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a small reporting company. See definition of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Small reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).  Yes  o     No  x

As of December 7, 2009, there were 22,363,675 shares of the Registrant’s common stock outstanding.
 
 


 
 
WINNER MEDICAL GROUP INC.
 
FORM 10-K
For the Fiscal Year Ended September 30, 2009

Number
   
Page
   
PART I
 
       
Item 1.
 
Description of Business
4
Item 1A.
 
Risk Factors
13
Item 1B.
 
Unresolved Staff Comments
19
Item 2.
 
Properties
19
Item 3.
 
Legal Proceedings
21
Item 4.
 
Submission of Matters to a Vote of Security Holders
21
       
   
PART II
 
       
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
22
Item 6.
 
Selected Financial Data
22
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
36
Item 8.
 
Financial Statements and Supplementary Data
36
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
37
Item 9A.
 
Controls and Procedures
37
Item 9B.
 
Other Information
38
       
   
PART III
 
       
Item 10.
 
Directors and Executive Officers of the Registrant
38
Item 11.
 
Executive Compensation
40
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management
45
Item 13.
 
Certain Relationships and Related Transactions
46
Item 14.
 
Principal Accountant Fees and Services
46
       
   
PART IV
 
       
Item 15.
 
Exhibits and Financial Statement Schedules
48

 
2

 

Use of Terms

Except as otherwise indicated by the context, references in this report to “Winner Medical”, the “Company” “we”, “us”, or “our”, are references to the combined business of Winner Medical Group Inc. and its wholly-owned subsidiary, Winner Group Limited, along with Winner Group Limited’s wholly-owned subsidiaries which include Winner Industries (Shenzhen) Co., Ltd., Winner Medical & Textile Ltd. Zhuhai, Winner Medical & Textile Ltd. Jingmen, Hubei Winner Textiles Co. Ltd., Winner Medical & Textile Ltd. Yichang, Winner Medical & Textile Ltd. Jiayu, Winner Medical & Textile Ltd. Chongyang and Winner Medical (Huanggang) Co., Ltd. and Winner Group Limited’s majority owned subsidiary Shanghai Winner Medical Apparatus Co., Ltd. and Winner Medical (Hong Kong) Limited.  References to “Winner Group Limited” or “Winner Group” are references to Winner Group Limited and its subsidiaries listed above. References to “China” and the “PRC” are references to the “People’s Republic of China.” References to “U.S.” are references to the United States of America. References to “RMB” are to Renminbi, the legal currency of China, and all references to “$” are to the legal currency of the United States.

Forward-Looking Statement

Statements contained in this Annual Report on Form 10-K include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Forward-looking statements may be identified by the use of forward-looking terminology such as “may”, “will”, “could”, “should”, “project”, “expect”, “believe”, “estimate”, “anticipate”, “intend”, “continue”, “potential”, “opportunity” or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. Potential risks and uncertainties include, among other things, such factors as:

 
·
the Companys dependence upon international customers;
 
·
international trade restrictions;
 
·
foreign currency fluctuation;
 
·
developments in the healthcare industry;
 
·
the Companys dependence on patent and trade secret laws;
 
·
the Companys revenues are highly concentrated in a single customer;
 
·
uncertainties with respect to the PRC legal and regulatory environment;
 
·
the Companys ability to adequately finance the significant costs associated with the development of new medical products;
 
·
potential product liability claims for which the Company does not have insurance coverage; and
 
·
other risks identified in this Report and the Company other filings with the SEC.

Readers are urged to carefully review and consider the various disclosures made by the Company in this Annual Report on Form 10-K and the Company’s other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect the Company’s business, financial condition and results of operations and prospects. The forward-looking statements made in this Form 10-K speak only as of the date hereof and the Company disclaims any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in the Company’s expectations or future events.

 
3

 

PART I

Item 1. Description of Business

Recent Events

On October 6, 2009, the Company’s Board of Directors approved and authorized the Company to complete a one-for-two reverse split of the Company’s common stock, decreasing the Company’s authorized capital to 247,500,000 shares of common stock and 2,500,000 shares of preferred stock, par value $0.001 per share. Pursuant to the Nevada Revised Statues, shareholder approval of this action was not required.

Background
 
The Company was originally incorporated under the name Birch Enterprises, Inc. in the state of Nevada in August 1986. On September 14, 1987, the Company consummated a business combination transaction with Las Vegas Resort Investments whereby Las Vegas Resort Investments became the Company’s wholly-owned subsidiary. Concurrent with this transaction, the Company changed its corporate name to Las Vegas Resorts Corporation. During September 1992 all of the Company’s operations ceased. The Company had no active operations from then until December 16, 2005, when it completed a reverse acquisition transaction, discussed below under “—Acquisition of Winner Group Limited,” with Winner Group Limited, a Cayman Islands corporation, whose subsidiary companies originally commenced business in February 1991.

Winner is a technology-driven medical dressings and medical disposables manufacturer based in China. Winner became the Company’s wholly-owned subsidiary in connection with the reverse acquisition transaction and is the holding company for all of the Company’s commercial operations.

On February 13, 2006, the Company amended its Articles of Incorporation to change its name from Las Vegas Resorts Corporation to Winner Medical Group Inc.  The Company changed its name to reflect its new business and the names of its subsidiary companies.

Acquisition of Winner Group Limited
 
On December 16, 2005, the Company completed a reverse acquisition transaction with Winner Group Limited whereby the Company issued to the stockholders of Winner Group Limited 42,280,840 shares of its common stock in exchange for all of the issued and outstanding capital stock of Winner Group Limited. These 42,280,840 shares had been restated to 21,140,420 shares in the Company’s financial statements to reflect a reverse stock split of 1 new share of common stock for 2 old shares of common stock on October 6, 2009. Winner Group Limited thereby became the Company’s wholly-owned subsidiary and the former stockholders of Winner Group Limited became the Company’s controlling stockholders.

For accounting purposes, the share exchange transaction was treated as a reverse acquisition with Winner Group Limited as the acquirer and Winner Medical Group Inc. as the acquired party. When the Company refers in this prospectus to business and financial information for periods prior to the consummation of the reverse acquisition, the Company is referring to the business and financial information of Winner Group Limited on a consolidated basis unless the context suggests otherwise.

Winner Group Limited’s operations began with Winner Medical & Textile Ltd. Zhuhai, which was incorporated in China in February 1991 by the Company’s CEO, President and director Mr. Jianquan Li. Winner Group Limited was incorporated as a Limited Liability Exempted Company in the Cayman Islands in April 2003 and is the holding company of all of the Company’s business operations. Below is the Company’s holding company structure.

 
4

 


* On February 1, 2008, the Company stopped all the business operations of Winner Medical & Textile Ltd. Zhuhai, “Winner Zhuhai”, and filed for the deregistration of Winner Zhuhai with various government authorities in the PRC. As of June 30, 2009, Winner Zhuhai received approvals from various government authorities in the PRC regarding its application for deregistration, except the relevant tax bureau clearance is still on-going.

The Companys Business
 
Through its subsidiary Winner Group Limited, the Company’s business consists of research and development, manufacturing and marketing of medical dressings and medical disposables. The Company has seven wholly-owned operating subsidiaries and four joint venture companies, and it established several integrated manufacturing and processing lines for its core products. The Company’s product offerings include medical care products, wound care products, home care products and PurCotton products, a new product of nonwoven fabric made from 100% natural cotton.

The Company is one of the leading manufacturers of medical dressings and medical disposables in China. The products are sold worldwide, with Europe, the United States and Japan serving as the top three markets. Certain of the Company’s medical device products are registered and listed with the U.S. Food and Drug Administration or FDA, giving the Company the approval to export those sterilized products directly to the United States.

 
5

 

The Companys Strategy
 
The Company’s primary business strategy is to achieve annual growth in revenue by building its brand and reputation. The Company seeks to implement its business strategy by focusing on:

Marketing Own Brand Product in China

The surgical dressing and medical disposables market in China is expanding quickly. According to Research and Markets http://www.researchandmarkets.com/, certain marketing researches showed that the demand for disposable medical products has experienced rapid growth. In the future, the medical market in China will become increasingly regulated due to the Chinese government’s efforts to reform its medical care system. These factors create opportunities for companies, such as Winner Medical, that had already followed such strict conduct and quality control regulations.

During fiscal year 2009, approximately 16.87% of the Company’s sales revenue was generated domestically in China, and this percentage is expected to increase. The Company’s sales channel in China includes: hospitals, local distributors, and Over-The-Counter, or OTC, drugstore chains.

PurCotton Products

The PurCotton product, new spunlace cotton nonwoven products, combines the superior characteristics of both natural cotton and materials made using nonwoven technology. It is expected to have advantages over woven cotton or synthetic nonwoven fabric, such as it is natural, safe, strong, durable, healthy, environmentally friendly, and of higher quality. The Company intends to utilize its patented manufacture process to enable it to produce PurCotton at a lower cost than woven cotton products, so it believes the launch of the cotton nonwoven spunlace products will provide a significant advantage to the Company. Patent applications covering the invention of spunlace cotton nonwoven process have been made in more than 50 countries. Patents have been granted in China, the United States, Russia, Singapore, South Africa, Mexico, Nigeria, Philippines, and member states of the European Patent Office.

To execute its strategy, the Company entered into an agreement in 2005 with the local government agency of Huanggang to acquire 564,742 square meters, approximately 140 acre, of land that will mostly be dedicated to the construction of 100% cotton spunlaced nonwoven fabric production facilities in the Company’s subsidiary Winner Medical (Huanggang) Co., Ltd., “Winner Huanggang”. Land use right certificates of this land were issued to the Company in November 2005 and July 2007. As of September 30, 2009, the first two PurCotton manufacturing lines are producing in full capacity; compared to the third quarter, the third manufacturing line has completed testing and started production, and its production is expected to increase. In August 2009, the Company entered into a contract with a machine producer in China to purchase new machineries for the fourth production line, these machineries are expected to start production in the second quarter of 2010. The Company started selling PurCotton products to customers in China, the United States, Europe and Japan for both consumer and medical use. During fiscal year 2009 and 2008, gross profit from these products reached approximately $1,452,000 and $95,000 respectively.

Providing High Quality Products

The Company’s goal is to manufacture and sell products that are of the highest quality in the industry and in accordance with established industry standards. The Company’s quality management system is certified by the International Organization for Standardization and is registered under ISO 9001 ISO 13485:2003. Currently, over 90% of the Company’s products have obtained EU CE Certificates. The Company has 30 types of products registered and listed with the FDA in the U.S., where it is proud to be authorized by the FDA to export sterilized products directly. Among those products are sterilization pouches and face masks, which have 510(k) FDA certificates. Japanese certificates, which are awarded to individual factories, have been granted to Winner Medical’s Shenzhen factory, Jiayu Factory, and Chongyang Factory, which are all qualified and entitled to export products to Japan directly.

Providing Customers with a Complete Product Line – One Stop Procurement Services

The Company provides to customers all over the world specialized medical dressing products that are intended to address a number of customer issues and needs. The Company’s products are designed to meet a wide variety of its client’s product configuration demands. The Company employs manufacturing equipment, including gauze sponge bleaching equipment, sterile packaging machines, auto-gauze sponges folding machines, nonwoven sponge folding machines, and steam sterilization and ethylene oxide, or ETO, sterilization processing which it believes allow the Company to produce its products in a cost efficient manner.

Developing Products Through Research and Development

The Company’s research and development efforts are aimed at finding new varieties of products, improving existing products, improving product quality and reducing production costs.

The Company intends to focus significant efforts on opening new opportunities for its new products. The Company believes the following products will contribute to its growth.

 
6

 

Implementing Advanced Information Technology System

The Company has implemented the Enterprise Resources Planning, “ERP”, software provided by a Systems Applications and Products company, “SAP”, or SAP ERP system, which integrates all of the core business operations of each of its subsidiaries-from production, supply, and sales to financial records-into one system. Looking forward, the Company’s goal is to build a platform on which the Company can share information with its customers, including raw material preparation, production status, inventory, and transportation.

Managing Business Effectively Through Strong Management Team

Each member of the Company’s management team has an average of ten years of experience in the industry. Under their leadership, the Company has a demonstrated record of rapid and orderly growth.  The Company intends to capitalize on the acumen and industry experience of several members of its management team to grow its business.

Building a Broad Customer Base

The Company has many customers in all major regions throughout the world. The Company’s customers are located in China, Japan, Germany, North America, Italy, Australia, France, the United Kingdom, the Netherlands, South America, Africa, the Middle East and other places around the globe. Its largest markets are currently Japan, the Europe and the United States. The Company intends to broaden its customer base by diversifying its sales and marketing efforts.

Developing and Expanding the Companys Logistics Capabilities

Logistics capability is an important aspect of the Company’s strategy. The Company believes it is important to have warehouses in large transportation ports and near central cities. The Company’s use of modern logistics management methods is designed to enhance its service levels, including its ability to deliver products to customers in a timely fashion, and the Company strives to handle customer service inquiries quickly and accurately. Information on purchase order confirmation, production or order status and shipping advice is readily available. The Company also offers its customers a variety of payment terms to facilitate international purchases.

The Companys Products
 
The Company’s products can be divided into the following four categories according to their functions:

Medical care products
Include operating room products, procedural packs, protective products and gauze.

Wound care products
Include dressing pads, cotton products, retention products and dental products.

Home care products
Include cosmetic products, handkerchiefs, sweat pads and bathing sets.

PurCotton products
New spunlace 100% cotton nonwoven products. Include jumbo rolls as consumer raw materials, operating room towels, lap sponges, swabs and surgical gowns, as well as finished consumer products such as wipes and cosmetic cotton products.

The Company continuously focuses on the development and launch of high value added products, and on increasing its sales volume of innovative new products, which have a higher profit rate.

The Company plans to continue to penetrate the medical and health care market for medical disposable products, particularly in Japan, Europe and the U.S., which are the main markets for medical disposable products. It has established trade relationships with Sakai Shorten of Japan, which was its largest clients in fiscal year 2009, with total sales of approximately $14.54 million. The Company sells its products through Molnlycke Healthcare in Sweden, Covidien in the US, Artsana in Italy, Richardson in the UK, BSN Medical in Germany, and Medeco in Netherlands. In order to adapt the demand of increasing international orders, the Company has also established production systems designed to address international product demands, which include a one hundred thousand grade purification room and modern manufacturing equipment.

The Company also focuses on quality control. Its products have met the requirements of major international medical product quality tests, and it continuously seeks to improve its production systems and processes.

The Companys Intellectual Property
 
The Company currently has twenty five issued patents. Below are the brief descriptions of these patents:

 
7

 
 
Description of Patent
 
Patent No.
 
Type
 
Status
Manufacture Method of the Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby
 
ZL 200510033576.9 (China)
 
Invention
 
Granted
             
Manufacture method of the 100% cotton non-woven medical dressings
 
 
ZL 200510033147.1 (China)
 
Invention
 
Granted
             
Colored non-woven cloth with special coat
 
ZL 200620013847.4 (China)
 
Utility Model
 
Granted
             
Colored 100% cotton gauze
 
ZL 200620132922.9 (China)
 
Utility Model
 
Granted
             
100% cotton gauze with protective function
 
ZL 200620132920.X (China)
 
Utility Model
 
Granted
             
A medical dressing resists penetration and adhesion
 
ZL 200620132921.4 (China)
 
Utility Model
 
Granted
             
An ancillary fight code machine
 
ZL 200620017009.4 (China)
 
Utility Model
 
Granted
             
A safety medical gauze with detective device
 
ZL 200620014971.2 (China)
 
Utility Model
 
Granted
             
Wipes box
 
ZL 200630060318.5 (China)
 
Appearance design
 
Granted
             
Spunlace non-woven cloth with special coat and protective function
 
ZL 200620013845.5 (China)
 
Utility Model
 
Granted
             
A testing equipment for cloth
 
ZL 200820091990.4 (China)
 
Utility Model
 
Granted
             
Wound dressing
 
ZL 200820092733.2 (China)
 
Utility Model
 
Granted
             
Petrolatum dressing
 
ZL 200820105164.0 (China)
 
Utility Model
 
Granted
             
Product of and Method for hydrophobic 100% cotton non-woven cloth
 
ZL 200820093952.2 (China)
 
Utility Model
 
Granted
             
Packing device for medical dressing products
 
ZL 200820094531.1 (China)
 
Utility Model
 
Granted
             
Draw out wipes box
 
ZL 200520035670.3 (China)
 
Utility Model
 
Granted
             
Medical product box
 
ZL 200820207244.7 (China)
 
Utility Model
 
Granted
             
Embossed non-woven cloth
 
ZL 2008201397530 (China)
 
Utility Model
 
Granted
             
A care package
 
ZL 200820235800.1 (China)
 
Utility Model
 
Granted
             
A bondage
 
ZL 200920129524.5 (China)
 
Utility Model
 
Granted
             
A protective facemask
 
ZL 200920135220.X (China)
 
Utility Model
 
Granted
             
Disposable medical compound eye-protective face mask
 
ZL 03273570.7 (China)
 
Utility Model
 
Granted
             
Method For Producing Spunlace Non-Woven Cloth, Method For Producing Spunlace Non-Woven Cloth With X-Ray Detectable Element, Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby
 
1-2007-501648 (Philippine)
 
Invention
 
Granted
             
Method For Producing Spunlace Non-Woven Cloth, Method For Producing Spunlace Non-Woven Cloth With X-Ray Detectable Element, Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby
 
2007/7583 (South Africa)
 
Invention
 
Granted
             
Method For Producing Spunlace Non-Woven Cloth, Method For Producing Spunlace Non-Woven Cloth With X-Ray Detectable Element, Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby
 
NG/C/2007/774 (Nigeria)
 
Invention
 
Granted

 
8

 

The Company has licensed from Jianquan Li, the Company’s CEO, President and Director, his rights under six patent and related technologies for nonwoven fabric manufacturing on a perpetual, worldwide royalty-free basis.  Below are the brief descriptions of these patent and patent applications:
 
Description of Patent  licensed from Jianquan Li
 
Patent No.
 
Type
 
Status
Method For Producing Spunlace Non-Woven Cloth, Method For Producing Spunlace Non-Woven Cloth With X-Ray Detectable Element, Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby
 
US 7049753 B2 (U.S.)
 
Invention
 
Granted
             
Method For Producing Spunlace Non-Woven Cloth, Method For Producing Spunlace Non-Woven Cloth With X-Ray Detectable Element, Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby
 
05013515.1 (E.U.)
 
Invention
 
Granted
             
Method For Producing Spunlace Non-Woven Cloth, Method For Producing Spunlace Non-Woven Cloth With X-Ray Detectable Element, Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby
 
2005118845 (Russia)
 
 
Invention
 
Granted
             
Method For Producing Spunlace Non-Woven Cloth, Method For Producing Spunlace Non-Woven Cloth With X-Ray Detectable Element, Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby
 
200503941-7 (Singapore)
 
 
Invention
 
Granted
             
Method For Producing Spunlace Non-Woven Cloth, Method For Producing Spunlace Non-Woven Cloth With X-Ray Detectable Element, Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby
 
PA/a/2005/009218 (Mexico)
 
Invention
 
Granted
             
Spunlace Non-Woven Cloth With X-Ray Detectable Element Produced Thereby.  The Company added X-Ray detectable elements into the spunlace non-woven cloth so that it can be easily detected by X-ray, thereby avoiding leaving medical dressings in patient’s body
 
ZL 200520055659.3 (China)
 
Utility Model
 
Granted

The Company also has registered the trademark for the word “Winner” in China, the United States, Canada, Singapore, Libya, Jordan, the United Arab Emirates, Saudi Arabia, Thailand, Yemen, Chile, Cambodia and Hong Kong, and this trademark has passed the registration application in the member countries of the Madrid Agreement such as Germany, France, Italy, Russia, Switzerland, Australia, and etc. The trademark of “PurCotton” has also passed the registration in China, Hong Kong, the United States, European Union, Japan, Australia, Barisal, South Africa, Philippine, Russia, Egypt, and etc. Other trademarks, including “Winwin”, “Winband” in English and Chinese, and “SoftTouch”, have also been registered by the Company.

 
9

 

In addition, the Company has registered thirty six domain names, including www.winnermedical.com (currently in use), www.purcotton.com.cn, www.winnersofttouch.com, www.winner-industries.com, www.winner-shenzhen.com, www.winner-shanghai.com, and www.winner-beijing.com, and etc.

Where appropriate for the Company’s business strategy, the Company will continue to take steps to protect its intellectual property rights.

The Company’s Research and Development Efforts
 
The Company spent approximately $1,663,000, $1,802,000, and $2,050,000 on research and development in fiscal years 2009, 2008 and 2007, respectively.

The Company’s research and development in 2009 was mainly focused on developing new finished PurCotton products for consumer use, and researching new coating technology for PurCotton products. Such coating technology will be applied on the production of PurCotton products to reduce the production cost and improve product quality.

PurCotton is a type of cotton products that is made of 100% cotton using nonwoven technology. As a natural product, it is environmentally friendly, reproducible, comfortable, non-allergenic and static-free.

With this new technology, the Company can produce environmentally friendly 100% cotton nonwoven at a lower cost. The Company’s new technology modifies the conventional manufacturing method of nonwoven cloth. The Company refined the production equipment and reduced the number of steps in making nonwoven cloth. As a result, the new technology allows the Company to minimize raw material waste, save production costs, and improve production efficiency.

The Company’s research and development activities adhere to strict procedures and utilize standardized processes. The Company is focused on further improving its core manufacturing technologies so that it can reduce waste and overall costs.

In addition, the Company uses advanced automatic equipment as part of its processing system, including folding machines, plastic absorbing machines and sterilization systems. These improvements not only reduce production costs, but also enable the Company to further diversify its product lines.

The Companys Marketing Efforts
 
The Company’s products are sold in all major regions internally through a network of distributors, wholesalers, manufactures, whereby it provides each of its customers with a customized product that is then sold by such customer under its brand name, and manufacturers’ representatives. The Company’s major target markets are China, Japan, Europe and North and South America. In light of its existing production capacity constraints, the Company plans to meet the demands from international markets, and at the same time expand its sales to the Chinese market.

Since there are different requirements in different geographic markets, the Company has adopted marketing strategies that are market specific. For developed markets such as the U.S., Japan and the EU, the Company acts as supplier for its clients, providing each of them with a customized products in which the design, size, type and scale of the products is decided by its customers. This approach enables the Company to capitalize on its customers’ branding strengths and established market channels. In order to gain market share, the Company attempts to leverage its customers’ strong brand names, efficient distribution networks and market presence. The Company believes it is a better strategy for it to team up with large, well-known companies than to compete directly with them. Most of the Company’s sales in developed countries are conducted by direct marketing. In addition, the Company also conducts sales through third-party manufacturers’ representatives, who are compensated through payment of sales commissions.

In China and other developing countries, the Company sells its products under the “Winner” brand name. As the economies of China and other developing countries grow, the Company expected that there will be a significant increase in demand for medical products, including demand for the Company’s medical dressings and other medical disposable products. The Company believes its products are generally price-competitive with products from the U.S., Japan and the European countries. Competition can also come from local producers in the developing countries, but the Company attempts to compete with local manufacturers based on the quality of its products. Under these circumstances, the Company believes it has successfully established a reputation for its own brand based on low prices and high quality. The Company employs manufacturers’ representatives and actively participate in formal bid contracts organized by local governments and organizations. The Company believes it has built its brand reputation and market share in these markets and “Winner” has become a recognized brand in local hospitals, the home health care sector and retail markets in many developing countries.

 
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Raw Materials
 
The Company depends on external suppliers for all of the raw materials it uses to produce its products. The principal raw materials used for the Company’s products are cotton, non-woven cloth and packaging materials, each of which it purchases from a limited number of suppliers. The Company’s major supplier of cotton, non-woven cloth and packaging materials are Louis Dreyfus Beijing Trading Co. Ltd. (China) and Sino Protection (HeFei) Sanitary Material Co., Ltd. (China). The Company’s purchases from individual suppliers were less than 5% of its total purchase amount in fiscal year 2009. The Company believes it is not over-reliant on any of these suppliers.

Given the importance of key raw materials to the Company’s business, the Company carefully manages its purchasing efforts and has established company policies involving raw material procurement. The cost of raw materials, excluding the semi-process materials purchased, amounts to almost 55% of the Company’s total production cost.

Supplier Management System

The Company has established a strict supplier management system to comprehensively assess suppliers on the basis of quality and improvement, purchasing cycles, management systems, price and delivery cycles. Suppliers are formally evaluated twice a year. The quality of the suppliers determines how much business they receive from the Company in subsequent months. The Company also hosts an annual suppliers’ conference, during which it communicates directly with its suppliers its needs and service level demands. The Company undertakes an open and transparent purchasing practice, which is well received by most suppliers.

Purchasing Procedures

Purchasing transactions are conducted in accordance with a procedure termed “inquiry-comparison-negotiation.” Potential suppliers make initial offers that are compared objectively according to relevant guidelines. After validation of the various suppliers’ service and quality capabilities, the Company acquires the needed materials from the supplier offering the highest quality product at a reasonable cost. The Company’s financial department establishes an oversight process by appointing individuals to conduct independent market research of key price points. The research findings are announced periodically. The Company’s auditing department and quality assurance department also provide oversight to assure that it strictly adheres to all purchasing procedures.

The Company’s Major Customers
 
The Company has customers in approximately 80 countries throughout the world, including Japan, Germany, the United States, Italy, the Netherlands, the United Kingdom, Australia, France, China, as well as countries in South America, Africa and the Middle East. Some of the Company’s customers are large-scale producers and distributors with well known brand names, while others are import and export firms or wholesalers with trade expertise and established sales channels. The Company has long-term relationships with most of its customers.

No customer, other than Sakai Shoten Co., Ltd. accounted for more than 10% of the Company’s revenues in fiscal year 2009. Sakai Shoten Co., Ltd. accounted for approximately 14.78% and 15.66% of the Company’s revenue in fiscal years 2009 and 2008, respectively. Sakai Shoten Co., Ltd. acts as a purchasing agent for a large number of ultimate consumers of the Company’s products in Japan. If the Company loses this customer and is unable to replace this customer with other customers that purchase a similar amount of its products, the Company’s revenues and net income may decline considerably.

The Company’s Competition
 
The Company is subject to intense competition. Some of the Company’s competitors have greater financial resources, larger staff and more established market recognition than the Company does in the domestic Chinese market and international markets. Increased competition in the medical disposable product market could put pressure on the price at which the Company sells its products, resulting in reduced profitability for the Company.

In the Company’s industry, the Company competes based on manufacturing capacity, product quality, product cost, ability to produce a diverse range of products and logistics capabilities.

The Company’s competitors include medical dressing and other medical disposable product manufacturers around the world. Below is a list by geographic area of the companies that the Company views as its most significant competitors in the major markets in which it sells its products.

Competitors based in China
 
The Company’s competitors based in China primarily include: Shenzhen Aumei, Zhejiang Zhende Medical Dressing Co., Ltd., Jiangsu Province Jianerkang Medical Dressing Co., Ltd., and Qingdao Hartmann Medical Dressing Co., Ltd.

The Company’s China-based competitors tend to have lower labor costs, and the Company believes that their products are of lower quality and often lack diversity, and they are weak in brand building and management.

Competitors based in Asia (Outside of China)

Competitors based in this area mainly come from India and countries in Southeast Asia, such as Premier Enterprise and Sri Ram Products, whose main business is weaving.

 
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These competitors lack of interconnected businesses, suppliers within the local industry; and they tend to have lower employee and management quality, as well as lower product quality.

Competitors based in Europe and North America

Competitors based in Europe and North America include: Bastos Viegas, S.A. (Portugal), Intergaz, S.R.O. (Czech Republic), and TZMO S.A. (Poland).

The Company’s competitors from Europe may have a geographic advantage in the EU market, but the Company believes they have less product diversity and higher production costs.

Regulation
 
The Company is subject to complex and stringent governmental laws and regulations relating to the manufacture and sale of medical dressings and medical disposables in China and in many other countries in which it sells its products. These laws and regulations in the major markets in which it competes are discussed further below. All of the regulatory laws and regulations may be revised or reinterpreted, or new laws and regulations may become applicable that could have a negative effect on the Company’s business and results of operations. See Item 1A. “Risk Factors — Risks Related to the Company’s Industry — the Company’s failure to comply with ongoing governmental regulations could impair its operations and reduce its market share.”

China

In China, medical sanitary materials and dressings, including medical gauzes, absorbent cottons, bandages and disposable surgical suits, are regulated as medical devices and are administered by the Department of Medical Devices of the State Drug Administration of China. The technology and specifications of these products must be consistent with the Regulations for the Supervision and Administration of Medical Devices and relevant laws and standards.

The Company’s business is regulated by a number of provincial authorities that license the production of, and register, products such as those the Company manufactures. Eight of the Company’s wholly-owned subsidiaries, which require licenses from these authorities, operate under current licenses.

Other Countries

In addition, since the Company sells its products in the international markets, its products are subject to regulations imposed by various governmental agencies in the markets where the Company’s products are sold. All of the Company’s products exported to European countries must have a CE certificate, CE-certification or CE Marking, which is a conformity marking consisting of the letters “CE”. The CE Marking applies to products regulated by certain European health, safety and environmental protection legislation. The CE Marking is obligatory for products it applies to and the manufacturer affixes the marking in order to be allowed to sell his products in the European market.

In Japan, the Company needs a Certificate of Foreign Manufacture from the Pharmaceuticals and Medical Devices Agency of Ministry of Health, Labor and Welfare of Japan in order to sell its products in the Japanese market. The Company has reached the applicable standards and obtained the required certificates in the Europe and Japan.

In the U.S., some of the Company’s products are considered medical devices. The FDA regulates the design, manufacture, distribution, quality standards and marketing of medical devices. Accordingly, the Company’s product development, testing, labeling, manufacturing processes and promotional activities for certain products that are considered medical devices are regulated extensively in the U.S. by the FDA. The FDA has given the Company clearance to market such products within the U.S.

Under the U.S. Federal Food, Drug, and Cosmetic Act, or “FFDCA”, medical devices are classified into one of three classifications, each of which is subject to different levels of regulatory control, with Class I being the least stringent and Class III being subject to most control. Class III devices, which are life supporting or life sustaining, or which are of substantial importance in preventing impairment of human health, are generally subject to a clinical evaluation program before receiving pre-market approval, or PMA, from the FDA for commercial distribution. Class II devices are subject in some cases to performance standards that are typically developed through the joint efforts of the FDA and manufacturers, but do not require clinical evaluation and pre-market approval by the FDA. Instead, these products require a pre-market notification to the FDA and in most cases a showing of substantial equivalence to an existing product under Section 510(k) of the FFDCA. Class I devices are subject only to general controls, such as labeling and record-keeping regulations, and are generally exempt from pre-market notification or approval under Section 510(k) of the FFDCA, although they are required to be listed with the FDA. The Company’s medical device products are generally considered Class I devices; therefore, they are exempt from pre-market notification or approval requirements. The Company has listed all of its relevant products with the FDA pursuant to the FFDAC.

If a 510(k) pre-market notification is required for a medical device, then such device cannot be commercially distributed until the FDA issues a letter of substantial equivalence, approving the sale of the product. Certain of the Company’s surgical face masks and sterilization pouches are subject to the 510(k) pre-market notification requirements. The Company has already received the necessary approvals from the FDA for such products.

 
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The Company’s medical device products are also subject to the general labeling requirements under the FDA medical device labeling regulations. As of September 30, 2009, the Company has labeled all of its medical device products and was not subject of any enforcement action initiated by the FDA.

In addition, manufacturers of medical devices distributed in the U.S. are subject to various regulations, which include establishment registration, medical device listing, quality system regulation (QSR) and medical device reporting. Under FFDAC, any foreign establishment that manufactures, prepares, propagates, compounds or processes a medical device that is imported, or offered for import, into the U.S. is required to register its establishment with the FDA. In addition, any foreign establishment that engages in manufacturing, preparation, compounding, assembly or processing of a medical device intended for commercial distribution in the U.S. is required to list its devices with the FDA. The Company’s subsidiary Winner Shenzhen, which exports all its products, has registered its establishment with the FDA and has listed 31 medical and dental devices.

The Company’s manufacturing processes are required to comply with the applicable portions of the QSR, which covers the methods and documentation of the design, testing, production, processes, controls, quality assurance, labeling, packaging and shipping of its medical device products. The QSR, among other things, requires maintenance of a device master record, device history record and complaint files. As of September 30, 2009, the Company was not the subject of any enforcement actions initiated by the FDA.

The Company is also required to report to the FDA if its products cause or contribute to a death or serious injury or malfunction in a way that would likely cause or contribute to death or serious injury were the malfunction to recur. The FDA can require the recall of products in the event of material defects or deficiencies in design or manufacturing. The FDA can withdraw or limit the Company’s product approvals or clearances in the event of serious, unanticipated health or safety concerns. The Company may also be required to submit reports to the FDA of corrections and removals. As of September 30, 2009, the Company had not received any complaints that any of its products had contributed to a death or serious injury, or that they suffered any such malfunctions or defects.

The FDA has broad regulatory and enforcement powers. If the FDA determines that the Company has failed to comply with applicable regulatory requirements, it can impose a variety of enforcement actions ranging from public warning letters, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance of approvals, seizure or recall of the Company’s products, total or partial shutdown of production, withdrawal of approvals or clearances already granted and criminal prosecution. The FDA can also require the Company to repair, replace or refund the cost of devices that it manufactured or distributed. The Company’s failure to meet any of these requirements may cause the FDA to detain its products automatically when they are presented for entry into the U.S. If any of these events occur, it could create a material adverse impact on the Company. As of September 30, 2009, the Company was not the subject of any enforcement actions initiated by FDA.

The Company’s Employees
 
As of September 30, 2009, the Company employed approximately 4,459 full-time employees. The Company believes that it maintains a satisfactory working relationship with its employees and it has no significant labor disputes or any difficulty in recruiting staff for its operations.

As required by applicable Chinese law, the Company has entered into employment contracts with all of its officers, managers and employees.

The Company’s employees in China participate in a state pension scheme organized by the Chinese municipal and provincial governments. The Company is required to contribute to the scheme at rates ranging from 8% to 29% of the average monthly salary. The expenses related to this scheme were $626,606, $515,232, and $356,113 for fiscal years 2009, 2008 and 2007 respectively.
 
Item 1A. Risk Factors

You should carefully consider the following risks, as well as the other information contained in this annual report, before investing in the Company’s securities. If any of the following risks actually occurs, the Company’s business could be harmed. You should refer to the other information set forth or referred to in the Company’s annual report, including its consolidated financial statements and the related notes incorporated by reference herein.

RISKS RELATED TO THE COMPANY’S BUSINESS
 
The Company’s dependence upon international customers may impede its ability to supply products

During fiscal year 2009, approximately 83% of the Company’s products were sold internationally.  As a result, the Company is subject to risks associated with shipping products across borders, including shipping delay.  If the Company cannot deliver its products on a competitive and timely basis, its relationships with international customers may be damaged and its financial condition could be harmed.

 
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The Company engages in international sales, which expose it to trade restrictions
 
As a result of the Company’s product sales in various geographic regions, the Company may be subject to the risks associated with customs duties, export quotas and other trade restrictions that could have a significant impact on its revenue and profitability.  While the Company has not encountered significant difficulties in connection with the sales of its products in international markets, the future imposition of, or significant increases in the level of, custom duties, export quotas or other trade restrictions could have an adverse effect on the Company.  Further, the Company cannot assure that the laws of foreign jurisdictions where it sells and seeks to sell its products afford similar or any protection of its intellectual property rights as may be available under U.S. laws.  The Company is directly impacted by the political, economic, military and other conditions in the countries where it sells or seeks to sell its products.
 
Expansion of the Company’s business may put added pressure on its management, financial resources and operational infrastructure, impeding the Company’s ability to meet any increased demand for its medical products and possibly impairing its operating results

The Company’s business plan is to significantly grow its operations to meet anticipated growth in demand for existing products, and by the introduction of new product offerings.  The Company’s planned growth includes the construction of several new production lines to be put into operation over the next five years.  Growth in the Company’s business may place a significant strain on its personnel, management, financial systems and other resources.  The Company may be unable to successfully and rapidly expand sales to potential customers in response to potentially increasing demand or control costs associated with its growth.

To accommodate any such growth and compete effectively, the Company may need to obtain additional funding to improve information systems, procedures and controls and expand, train, motivate and manage its employees, and such funding may not be available in sufficient quantities.  If the Company is not able to manage these activities and implement these strategies successfully to expand to meet any increased demand, the Company’s operating results could suffer.

The Company relies on patent and trade secret laws that are complex and difficult to enforce

The validity and breadth of claims in medical technology patents involve complex legal and factual questions and, therefore, the extent of their enforceability and protection is highly uncertain.  Issued patents or patents based on pending patent applications or any future patent applications may not exclude competitors or may not provide a competitive advantage to the Company.  In addition, patents issued or licensed to the Company may not be held valid if subsequently challenged and others may claim rights in or ownership of such patents.  Furthermore, the Company cannot assure that its competitors have not developed or will not develop similar products, will not duplicate the Company’s products, or will not design around any patents issued to or licensed by the Company.

The Company depends on key personnel, and turnover of key employees and senior management could harm its business

The Company’s future business and results of operations depend in significant part upon the continued contributions of its key technical and senior management personnel, including Jianquan Li, Xiuyuan Fang, Jiagan Chen and Nianfu Huo, who hold the titles of CEO, President and Chairman, CFO and Vice President, Vice President of Project Management and Senior Vice President and Chairman of Supervisory Board, respectively.  They also depend in significant part upon the Company’s ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for its operations.  If the Company loses a key employee or if a key employee fails to perform in his or her current position, or if the Company is unable to attract and retain skilled employees as needed, the Company’s business could suffer.  Significant turnover in the Company’s senior management could significantly deplete the Company’s institutional knowledge held by its existing senior management team.  The Company depends on the skills and abilities of these key employees in managing the manufacturing, technical, marketing and sales aspects of its business, any part of which could be harmed by further turnover.

The Company’s revenues are highly concentrated in a single customer and the Company’s business will be harmed if this customer reduces its orders from the Company

In fiscal year 2009, almost 14.78% of the Company’s business comes from just one customer, Sakai Shoten Co., Ltd, which acts as a purchasing agent for a large number of ultimate consumers of the Company’s products in Japan.  If the Company loses this customer and is unable to replace this customer with other customers that purchase a similar amount of the Company’s products, the Company’s revenues and net income would decline considerably.

The Company is subject to potential product liability claims for which it does not have insurance coverage

Defects in the Company’s products could subject to potential product liability claims that its products are ineffective or cause some harm to the human body.  The Company does not have product liability insurance.  Plaintiffs may advance claims that the Company’s products or actions resulted in some harm.  A successful claim brought against the Company could significantly harm its business and financial condition.

 
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The Company may not be able to adequately finance the significant costs associated with the development of new medical products

The medical products in the medical dressings and medical disposables market change dramatically with new technological advancements.  The Company is currently conducting research and development on a number of new products, which require a substantial outlay of capital.  To remain competitive, the Company must continue to incur significant costs in product development, equipment, facilities and invest in research and development of new products.  These costs may increase, resulting in greater fixed costs and operating expenses.

In addition to research and development costs, the Company could be required to expend substantial funds for and commit significant resources to the following:

 
·
additional engineering and other technical personnel;
 
·
advanced design, production and test equipment;
 
·
manufacturing services that meet changing customer needs;
 
·
technological changes in manufacturing processes; and
 
·
manufacturing capacity.

The Company’s future operating results will depend to a significant extent on its ability to continue to provide new products that compare favorably on the basis of cost and performance with the design and manufacturing capabilities of competitive third-party suppliers and technologies.  The Company will need to sufficiently increase its net sales to offset these increased costs, the failure of which would negatively affect the Company’s operating results.

The current global financial crisis may have a negative impact on the Company’s business and financial condition, especially on the market acceptance of the Company’s new PurCotton products

The current worldwide economic crisis has created significant reductions in available capital and liquidity from banks and other providers of credit, which may adversely affect the Company’s customers’ ability to buy the Company’s new PurCotton products and fulfill their obligations to the Company.  Additionally, many of the effects and consequences of the current global financial crisis and a broader global economic downturn are currently unknown; any one or all of them could potentially have a material adverse effect on the Company’s customers' or the Company’s own liquidity and capital resources, or otherwise negatively impact the Company’s business and financial results.

The Company’s PurCotton products may be adversely affected by price reductions of raw materials of the Company’s competitive products

Markets for all of the Company’s products, especially the Company’s PurCotton products, are extremely competitive. The Company competes based upon a variety of factors, including cost of production and raw materials.  It is possible that the Company’s competitors have lowered their cost of production due to price decrease in rayon and polyester and engage in price competition through aggressive pricing policies to secure a greater market share to the Company’s detriment.  The Company’s PurCotton business may be adversely affected by competition, and the Company may not be able to maintain its profitability if the competitive environment worsens.

In order to grow at the pace expected by management, the Company will require additional capital to support its long-term business plan. If the Company is unable to obtain additional capital in future years, it may be unable to proceed with its long-term business plan and the Company may be forced to curtail or cease its operations

The Company will require additional working capital to support its long-term business plan, which includes identifying suitable targets for horizontal or vertical mergers or acquisitions, so as to enhance the overall productivity and benefit from economies of scale. The Company’s working capital requirements and the cash flow provided by future operating activities, if any, will vary greatly from quarter to quarter, depending on the volume of business during the period and payment terms with its customers. The Company may not be able to obtain adequate levels of additional financing, whether through equity financing, debt financing or other sources. Additional financings could result in significant dilution to the Company’s earnings per share or the issuance of securities with rights superior to the Company’s current outstanding securities. In addition, the Company may grant registration rights to investors purchasing its equity or debt securities in the future. If the Company is unable to raise additional financing, it may be unable to implement its long-term business plan, develop or enhance its products and services, take advantage of future opportunities or respond to competitive pressures on a timely basis, if at all. In addition, a lack of additional financing could force the Company to substantially curtail or cease operations.

The Company may be exposed to potential risks relating to its internal controls over financial reporting and its ability to have those controls attested to by its independent auditors

As directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the companies’ internal controls over financial reporting in their annual reports, including Form 10-K.  These requirements first applied to the Company in connection with the Report for the fiscal year ended September 30, 2009. Management’s report on internal control over financial reporting is set out in Item 9A “Controls and Procedures.” of the 2009 Form 10-K. In addition, the independent registered public accounting firm auditing a company’s financial statements must also attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting as well as the operating effectiveness of the company’s internal controls. The Company can provide no assurance that it will be able to comply with all of the requirements imposed thereby.  The requirement for the auditor’s attestation in connection with the Report will be effected to the Company for the fiscal year ended September 30, 2010. There can be no assurance that the Company will receive a positive attestation from its independent auditors.  If significant deficiencies or material weaknesses in the Company’s internal controls are identified, the Company may not be able to remediate in a timely manner. In such case, investors and others may lose confidence in the reliability of the Company’s financial statements.

 
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The Company’s holding company structure and Chinese accounting standards and regulations may limit the payment of dividends

The Company has no direct business operations other than ownership of its subsidiaries.  While the Company has no current intention of paying dividends, should it decide in the future to do so, as a holding company, its ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from its operating subsidiaries and other holdings and investments.  In addition, the Company’s operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to the Company, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below.  If future dividends are paid in Renminbi, fluctuations in the exchange rate for the conversion of Renminbi into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations.  The Company’s subsidiaries in China are required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds.  Currently, the Company’s subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends.  If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, the Company will be unable to pay any dividends.

The Company may be subject to fines and legal sanctions imposed by State Administration of Foreign Exchange(SAFE) or other Chinese government authorities if it or its Chinese directors or employees fail to comply with recent Chinese regulations relating to employee share options or shares granted by offshore listed companies to Chinese domestic individuals

On December 25, 2006, the People’s Bank of China, or PBOC, issued the Administration Measures on Individual Foreign Exchange Control, and the corresponding Implementation Rules were issued by SAFE on January 5, 2007. Both of these regulations became effective on February 1, 2007. According to these regulations, all foreign exchange matters relating to employee stock holding plans, share option plans or similar plans with Chinese domestic individuals’ participation require approval from the SAFE or its authorized branch. On March 28, 2007, the SAFE issued the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, Chinese domestic individuals who are granted share options or shares by an offshore listed company are required, through a Chinese agent or Chinese subsidiary of the offshore listed company, to register with the SAFE and complete certain other procedures. As the Company is an offshore listed company, its Chinese domestic directors and employees who may be granted share options or shares shall become subject to the Stock Option Rule. Under the Stock Option Rule, employees stock holding plans, share option plans or similar plans of offshore listed companies with Chinese domestic individuals’ participation must be filed with the SAFE. After the Chinese domestic directors or employees exercise their options, they must apply for the amendment to the registration with the SAFE. The Company is reviewing the procedures for such SAFE registration.  If the Company or its Chinese domestic directors or employees fail to comply with these regulations, the Company or its Chinese domestic directors or employees may be subject to fines or other legal sanctions imposed by the SAFE or other Chinese government authorities.

RISKS RELATED TO THE COMPANY’S INDUSTRY
 
The Company may not be able to maintain or improve its competitive position because of strong competition in the medical dressing and medical disposable industry, and the Company expects this competition to continue to intensify

The medical dressing and medical disposable industry is highly competitive.  The Company faces competition from medical dressing and medical disposable manufacturers around the world.  Some of the Company’s international competitors are larger than the Company and possess greater name recognition, assets, personnel, sales and financial resources.  These entities may be able to respond more quickly to changing market conditions by developing new products and services that meet customer requirements or are otherwise superior to the Company’s products and services and may be able to more effectively market their products than the Company can because they have significantly greater financial, technical and marketing resources than the Company does.  They may also be able to devote greater resources than the Company can to the development, promotion and sale of their products.  Increased competition could require the Company to reduce its prices, resulting in fewer customer orders, and loss of market share.  The Company cannot assure that it will be able to distinguish itself in a competitive market.  To the extent that the Company is unable to successfully compete against existing and future competitors, the Company’s business, operating results and financial condition would face material adverse effects.

 
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Cost containment measures that are prevalent in the healthcare industry may result in lower margins

The health care market accounts for most of the demand for medical disposables products.  The health care market was typified in recent years by strict cost containment measures imposed by governmental agencies, private insurers and other “third party” payers of medical costs.  In response to these economic pressures, virtually all segments of the health care market have become extremely cost sensitive and in many cases hospitals and other health care providers have become affiliated with purchasing consortiums that obtain large quantities of needed products and thus can sell at much lower cost.  These factors in combination have hindered suppliers and manufacturers like the Company who may not be able to supply the large quantities sought by the purchasing consortiums or who are unable to respond to the need for lower product pricing.

The Company’s failure to comply with ongoing governmental regulations could impair its operations and reduce its market share

In China, medical sanitary materials and dressings, including medical gauzes, absorbent cottons, bandages and disposable surgical suits, are supervised as medical devices and are administered by the Department of Medical Device of State Drug Administration of China.  The technology and specifications of these types of products must conform to and comply with Regulations for the Supervision and Administration of Medical Devices of China and the relevant Chinese laws and standards.  In addition, since the Company sells its products in the international markets, its products are subject to regulations imposed by various governmental agencies in the markets where its products are sold.  For example, certain of the Company’s products exported to the U.S. must be listed with FDA.  All the Company’s products exported to EU countries must have the CE certificate.  The Company also needs a Certificate of Foreign Manufacture for the Japanese market.  These layers of regulation cause delays in the distribution of the Company’s products and may require the Company to incur operating costs resulting from the need to obtain approvals and clearances from regulators.  As to date, the Company has reached the applicable standards and obtained the required certificates in the markets mentioned above.

The Company’s margins are reduced when it sells its products to customers through a buying group

A trend in the Company’s industry is the use of buying groups by customers.  These buying groups aggregate the demand of several different customers and then buy products in bulk at lower prices than any of the customers would be able to obtain individually.  The Company has only limited production capacity.  This makes it difficult for the Company to meet the often large demand for its products from buying groups that represent overseas customers in developed countries.  A single order of one kind of product from a top 500 multinational buyer could require the full manufacturing capacity of one of the Company’s plants.  Although the Company has expanded its manufacturing capacity, its capacity is still not large enough to meet the demands of these clients.  As a result, the Company may lose business to other manufacturers of its products who have more manufacturing capacity than the Company does.

RISKS RELATED TO DOING BUSINESS IN CHINA
 
Changes in China’s political or economic situation could harm the Company and its operational results

Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the Chinese government could change these economic reforms or any of the legal systems at any time.  This has an unknown effect on the Company’s operations and profitability.  Some of the things that could have this effect are:

 
Level of government involvement in the economy;

 
Control of foreign exchange;

 
Methods of allocating resources;

 
Balance of payments position;

 
International trade restrictions; and

 
International conflict.

The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways.  As a result of these differences, the Company may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.

 
17

 

The Company’s business is largely subject to the uncertain legal environment in China and your ability to legally protect your investment could be limited

The Chinese legal system is a civil law system based on written statutes.  Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used.  The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China.  However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties.  These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign invested enterprises to hold licenses and permits such as requisite business licenses.  In addition, all of the Company’s executive officers and its directors are residents of China and not of the U.S., and substantially all the assets of these persons are located outside the U.S.  As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against the Company or any of these persons.

The Chinese government exerts substantial influence over the manner in which the Company must conduct its business activities

China has only recently permitted provincial and local economic autonomy and private economic activities.  The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership.  The Company’s ability to operate in China may be harmed by changes in its economic policies and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters.  The Company believes that its operations in China are in material compliance with all applicable legal and regulatory requirements.  However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on the Company’s part to ensure compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require the Company to divest itself of any interest the Company then holds in Chinese properties or joint ventures.

Future inflation in China may inhibit the Company’s activity to conduct business in China

In recent years, the Chinese economy has experienced periods of rapid expansion and widely fluctuating rates of inflation.  These factors have led to the adoption by Chinese government, from time to time, of various austerity measures designed to restrict the availability of credit or regulate growth and contain inflation.  High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for the Company’s products.

Restrictions on currency exchange may limit the Company’s ability to receive and use its revenues effectively

The majority of the Company’s revenues will be settled in Renminbi, U.S. dollars, and Euro, and any future restrictions on currency exchanges may limit the Company’s ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments in U.S. dollars.  Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business.  In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items.  The Company cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi.

The value of the Companys securities will be affected by the foreign exchange rate between other currencies and Renminbi

The value of the Company’s common stock will be affected by the foreign exchange rate between U.S. dollars and Renminbi, and between those currencies and other currencies in which the Company’s sales may be denominated, such as Euro, British pound, Australian dollars, and etc.  For example, to the extent that the Company needs to convert U.S. dollars into Renminbi for its operational needs and should the Renminbi appreciate against the U.S. dollar at that time, the Company’s financial position, the business of the Company, and the price of the Company’s common stock may be harmed.  Conversely, if the Company decides to convert its Renminbi into U.S. dollars for the purpose of declaring dividends on its common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Company’s earnings from its subsidiaries in China would be reduced.

RISKS RELATED TO THE MARKET FOR THE COMPANY’S STOCK
 
The Company’s common stock is quoted on The New York Stock Exchange AMEX, which may have an unfavorable impact on the Company’s stock price and liquidity

The Company’s common stock is quoted on The New York Stock Exchange AMEX under the symbol “WWIN”.  The New York Stock Exchange AMEX is a more limited market than the New York Stock Exchange or NASDAQ Stock Market.  The quotation of the Company’s shares on The New York Stock Exchange AMEX may result in a less liquid market available for existing and potential stockholders to trade shares of the Company’s common stock, could depress the trading price of the Company’s common stock and could have a long-term adverse impact on the Company’s ability to raise capital in the future.

 
18

 

The Company is subject to penny stock regulations and restrictions

The SEC has adopted regulations which generally define so-called “penny stocks” as an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions.  As of November 23, 2009, the closing price for the Company’s common stock was $5.05 but it has fluctuated around $5.00.  It the Company’s stock is a “penny stock”, it may become subject to Rule 15g-9 under the Exchange Act of 1934, or the “Penny Stock Rule.”  This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors”, generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses.  For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale.  As a result, this rule may affect the ability of broker-dealers to sell the Company’s securities and may affect the ability of purchasers to sell any of the Company’s securities in the secondary market.

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market.  Disclosure also is required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities.  Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

There can be no assurance that the Company’s common stock will qualify for exemption from the Penny Stock Rule.  In any event, even if the Company’s common stock were exempt from the Penny Stock Rule, the Company would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

Certain of the Company’s stockholders hold a significant percentage of the Company’s outstanding voting securities

Mr. Jianquan Li and his wife Ping Tse own 80.68% of the Company’s outstanding voting securities.  As a result, they possess significant influence, giving them the ability, among other things, to elect a majority of the Company’s Board of Directors and to authorize or prevent proposed significant corporate transactions.  Their ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer.

Certain provisions of the Companys Articles of Incorporation may make it more difficult for a third party to effect a change- in-control

The Company’s Articles of Incorporation authorizes the Board of Directors to issue up to 2,500,000 shares of preferred stock.  The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors without further action by the stockholders.  These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions.  The issuance of any preferred stock could diminish the rights of holders of the Company’s common stock, and therefore could reduce the value of such common stock.  In addition, specific rights granted to future holders of preferred stock could be used to restrict the Company’s ability to merge with, or sell assets to, a third party.  The ability of the Board of Directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent the Company’s stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of the Company’s common stock.

Item 1B. Unresolved Staff Comments
 
Not applicable.

Item 2. Properties

All land in China is owned by the government. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. The Company currently has land use rights to approximately 888,938 square meters in various parts of China, with total book value of approximately $4,835,796. All fees for acquiring such land use rights have been paid off as of September 30, 2009. The Company also has approximately 330,064 squares meters of structure in China, with total book value of approximately $23,813,258. Approximately 295,188 square meters of the Company’s lands and 36,397 square meters of structure are subject to mortgages.

The following table summarizes main land the Company owned as of September 30, 2009.

 
19

 

Winner Medical
Subsidiaries
 
Location
 
Land Size
(Square
Meters)
   
Net Book Value
(in US $)
 
Winner Medical & Textile Ltd. Jingmen
 
Te 1 Hangkong Road, Pailou Town, Jingmen City, Hubei Province , China
    40,542       41,469  
Winner Medical (Huanggang) Co., Ltd.
 
Te 1, Chibi Avenue, Huanggang City, Hubei Province, China
    564,742       2,480,634  
Winner Medical & Textile Ltd. Yichang
 
No. 20 Jiangxia Avenue, Jiangkou Town, Zhijiang City, Hubei Province, China
    24,448       105,916  
Winner Medical & Textile Ltd. Chongyang
 
Qingshan Park, Chongyang County, Hubei Province, China
    73,268       8,671  
Winner Medical & Textile Ltd. Jiayu
 
No. 172 Phoenix Avenue, Yuyue Town, Jiayu County, Hubei Province, China
    34,167       13,505  
Winner Industries (Shenzhen) Co., Ltd.
 
Winner Industrial Park, Bulong Road, Longhua, Shenzhen City, Guangdong Province, China.
    29,064       1,037,432  
Hubei Winner Textiles Co., Ltd.
 
No. 47 South Road of Jianshe, Yuekou Town, Tianmen City, Hubei Province. China
     122,707         1,148,169  
Total
         888,938        4,835,796  

The following table summarizes the Company’s main structures it owned as of September 30, 2009.

Winner Medical
Subsidiaries
 
Location
 
Structure Size
(Square
Meters)
   
Net Book Value
(in US $)
 
Winner Medical & Textile Ltd. Jingmen
 
Te 1 Hangkong Road, Pailou Town, Jingmen City, Hubei Province , China
    19,897       2,216,164  
Winner Medical (Huanggang) Co., Ltd.
 
Te 1, Chibi Avenue, Huanggang City, Hubei Province, China
    67,400       9,117,837  
Winner Medical & Textile Ltd. Yichang
 
No. 20 Jiangxia Avenue, Jiangkou Town, Zhijiang City, Hubei Province, China
    15,154       685,037  
Winner Medical & Textile Ltd. Chongyang
 
Qingshan Park, Chongyang County, Hubei Province, China
    74,097       3,212,983  
Winner Medical & Textile Ltd. Jiayu
 
No. 172 Phoenix Avenue, Yuyue Town, Jiayu County, Hubei Province, China
    20,700       1,162,012  
Winner Industries (Shenzhen) Co., Ltd.
 
Winner Industrial Park, Bulong Road, Longhua, Shenzhen City, Guangdong Province, China.
    36,397       4,752,263  
Hubei Winner Textiles Co., Ltd.
 
No. 47 South Road of Jianshe, Yuekou Town, Tianmen City, Hubei Province. China
     96,419        2,666,962  
Total
         330,064        23,813,258  
 
The following table summarizes the Company’s properties that are subject to mortgages as of September 30, 2009.

Mortgagor/Borrower
 
Location
 
Mortgagee/Lender
Bank
 
Land Subject
to Mortgage
sq. m
   
Structure Subject
to Mortgage
sq. m
 
Winner Industries (Shenzhen) Co., Ltd.
 
Winner Industrial Park, Bulong Road, Longhua, Shenzhen City, Guangdong Province, China.
 
China Merchants Bank, Shenzhen Branch
    -       18,808  
Winner Industries (Shenzhen) Co., Ltd.
 
Winner Industrial Park, Bulong Road, Longhua, Shenzhen City, Guangdong Province, China.
 
Shenzhen Industrial and Commercial Bank of China
    -       17,589  
Winner Medical (Huanggang) Co., Ltd.
 
Te 1, Chibi Avenue, Huanggang City, Hubei Province, China
 
Huanggang Industrial and Commercial Bank of China
     295,188        -  
Total
     295,188        36,397  

 
20

 

The Company entered into an agreement in 2005 with the local government agency of Huanggang to acquire 564,742 square meters, approximately 140 acres, of land which it plans to dedicate primarily to the construction of 100% cotton spunlace nonwoven fabric production facilities. The land use right certificate for 295,188 square meters, approximately 73 acres, of this land was issued to the Company in November 2005. The land use right certificate for 269,554 square meters, approximately 63 acres, of this land was issued to the Company in July 2007. As of September 30, 2009, the total investment for this project is approximately $26.43 million, which includes $2.48 million in land, $9.12 million in facilities and $14.09 million in equipment, $0.74 million in other aspects. Funds for this project were raised in the equity market and through bank loans.

The Company believes that all its land and structures have been adequately maintained, are generally in good condition, and are suitable and adequate for its business. The Company believes that the new facility under construction and the expected land use rights to additional land will be sufficient for its expansion efforts.

Some of the Company’s properties are leased from third parties. In most cases, the leased properties are dormitories or small operating spaces. In the remaining cases, the leased properties include manufacturing facilities and the use the Company is making of the land is in compliance with the relevant government authority’s land use planning. In a few cases, the lessers were unable to provide copies of documentation evidencing their rights to use the property leased to the Company. In the event of any future dispute over the ownership of the leased properties, the Company believes it could easily and quickly find replacement premises and dormitories so that the operations would not be affected.

Item 3. Legal Proceedings

From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.

The Company is currently not aware of any such legal proceedings or claims that it believes it will have a material adverse affect on its business, financial condition or operating results.

To the Company’s knowledge, no director, officer or affiliate of the Company, and no owner of record or beneficial owner of more than five percent, 5%, of the Company’s securities, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.

Item 4. Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of the Companys security holders during the fourth quarter of fiscal 2009. 

 
21

 

PART II

Item 5.  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is quoted under the symbol “WWIN” on the New York Stock Exchange AMEX since October 8, 2009. The CUSIP number is 97476P204.

During 2005, the Company filed a request with NASD Regulation Inc. for clearance of quotations on the OTC Bulletin Board or OTCBB under Subsection (a)(5) of Rule 15c2-11 of the Securities Exchange Act of 1934. A clearance letter was issued to the Company on April 27, 2005 and the Company was issued a trading symbol “LVRC.OB.” As a result of a 1:1,500 reverse split of the Company’s common stock that became effective on October 26, 2005, the Company’s trading symbol on the OTC Bulletin Board was changed from “LVRC.OB” to “LVGC.OB.” On March 6, 2006, in connection with the Company’s name change from Las Vegas Resorts Corporation to Winner Medical Group Inc., the Company’s trading symbol was changed from “LVGC.OB” to “WMDG.OB.” As a result of a 1:2 reverse split of the Company’s common stock that became effective on October 6, 2009, the Company’s trading symbol changed from “WMDG.OB” to “WWIN.OB”. Effective on October 8, 2009, the Company’s trading symbol changed from “WWIN.OB” to “WWIN” as a result of its common stocks having been traded on New York Stock Exchange AMEX. The following table sets forth, for the periods indicated, the high and low close prices for the Company’s common stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
   
High
   
Low
 
Fiscal 2008 – First quarter (10/1/07 to 12/31/07) *
  $ 4.6     $ 2.8  
Fiscal 2008 – Second quarter (1/1/08 to 3/31/08) *
  $ 3.9     $ 2.4  
Fiscal 2008 – Third quarter (4/1/08 to 6/30/08) *
  $ 3.4     $ 2.1  
Fiscal 2008 – Fourth quarter (7/1/08 to 9/30/08) *
  $ 2.2     $ 1.02  
Fiscal 2009 – First quarter (10/1/08 to 12/31/08) *
  $ 2.0     $ 0.4  
Fiscal 2009 – Second quarter (1/1/09 to 3/31/09) *
  $ 2.0     $ 0.8  
Fiscal 2009 – Third quarter (4/1/09 to 6/30/09) *
  $ 2.8     $ 1.4  
Fiscal 2009 – Fourth quarter (7/1/09 to 9/30/09) *
  $ 4.9     $ 2.4  
 
* One-for-two reverse stock split became effective on October 6, 2009, which automatically converted two shares of the Company's common stock into one share of common stock. The share prices are adjusted on post split basis.

Reports to Stockholders
 
The Company plans to furnish its stockholders with an annual report for each fiscal year ending September 30 containing financial statements audited by its independent certified public accountants. Additionally, the Company may, in its sole discretion, issue unaudited quarterly or other interim reports to its stockholders when it deems appropriate. The Company intends to maintain compliance with the periodic reporting requirements of the Securities Exchange Act of 1934.

Approximate Number of Holders of the Company’s Common Stock
 
On September 30, 2009, there were approximately 1,446 stockholders of record of the Company’s common stock.
 
Dividend Policy

Other than the dividends declared or paid by the Company’s subsidiary Winner Group Limited and the reverse stock split effected before the reverse acquisition transaction, the Company has never declared dividends or paid cash dividends.  The Company’s board of directors will make any decisions regarding dividends.  The Company currently intends to retain and use any future earnings for the development and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future.
 
Recent Sales of Unregistered Securities

None.

Item 6.  Selected Financial Data

The selected consolidated statement of income and comprehensive income data for the years ended September 30, 2009, 2008 and 2007 and the selected balance sheet data as of September 30, 2009, and 2008 are derived from the Company’s audited consolidated financial statements included elsewhere in this report. The selected consolidated financial data for the year ended September 30, 2006 and 2005 are derived from the Company’s audited consolidated financial statements not included in this report, and the selected balance sheet data as of September 30, 2007, 2006 and 2005 is derived from the Company’s audited consolidated financial statements not included in this report.

 
22

 

 The following selected historical financial information should be read in conjunction with the Company’s consolidated financial statements and related notes and the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

   
Year Ended September 30,
 
   
2005
   
2006
   
2007
   
2008
   
2009
 
Statement of operations data:
                             
Sales Revenues:
 
$
58,357,129
   
$
63,873,058
   
$
70,280,960
   
$
85,505,762
   
$
98,385,603
 
                                         
Cost of Sales
   
42,059,663
     
46,335,354
     
52,869,597
     
64,086,581
     
70,444,383
 
                                         
Gross profit
   
16,297,466
     
17,537,704
     
17,411,363
     
21,419,181
     
27,941,220
 
                                         
Expenses:
   
 
                                 
Administrative expenses
   
3,536,218
     
5,645,380
     
5,535,369
     
8,138,438
     
10,721,020
 
Amortization and depreciation
   
448,787
     
726,816
     
663,095
     
1,106,572
     
1,774,893
 
Other operating expenses
   
3,085,624
     
4,866,985
     
4,858,607
     
6,945,890
     
8,715,421
 
Provision for doubtful debt
   
1,807
     
25,789
     
13,667
     
85,976
     
230,706
 
Selling expenses
   
5,294,557
     
5,689,627
     
6,423,815
     
6,299,101
     
6,153,111
 
                                         
Total expenses
   
8,830,775
     
11,335,006
     
11,959,184
     
14,437,539
     
16,874,131
 
                                         
Income before taxes
   
8,362,388
     
6,326,690
     
5,662,391
     
5,563,166
     
11,421,176
 
Income taxes
   
446,146
     
516,635
     
-15,015
     
591,118
     
2,358,093
 
                                         
Net income
   
7,892,670
     
5,829,294
     
5,624,854
     
5,066,295
     
9,128,574
 
                                         
Pre - tax Income per common share
 
$
0.43
   
$
0.27
   
$
0.25
   
$
0.23
   
$
0.41
 
                                         
Earnings per share — basic and diluted
 
$
0.43
   
$
0.27
   
$
0.25
   
$
0.23
   
$
0.41
 
                                         
Weighted average number of shares outstanding — basic
   
18,495,642
     
21,526,695
     
22,338,675
     
22,363,675
     
22,363,675
 
—diluted
   
18,495,642
     
21,530,862
     
22,338,675
     
22,510,962
     
22,403,237
 
                                         
Cash dividend declared per common share
   
0.05
     
-
     
-
     
-
     
-
 
                                         
Cash flows data:
                                       
Net cash flows provided by/used in operating activities
 
$
4,340,346
   
$
10,272,612
   
$
7,662,424
   
$
9,644,401
   
$
14,688,351
 
Net cash flows provided by/used in investing activities
   
-3,089,900
     
-13,676,919
     
-12,246,855
     
-11,084,844
     
-3,281,369
 
Net cash flows provided by/used in financing activities
   
-268,782
     
5,046,022
     
6,295,377
     
958,553
     
-8,426,513
 

   
September 30,
 
   
2005
   
2006
   
2007
   
2008
   
2009
 
Balance sheet data:
                             
Cash and cash equivalents
 
$
2,650,867
   
$
4,319,579
   
$
6,377,488
   
$
6,462,505
   
$
9,493,026
 
Working capital
   
7,160,711
     
15,285,070
     
12,379,247
     
12,370,246
     
23,023,033
 
Total assets
   
54,223,425
     
67,171,711
     
85,121,335
     
101,918,091
     
100,936,009
 
                                         
Total current liabilities
   
18,667,138
     
14,735,036
     
24,085,690
     
28,966,069
     
18,679,691
 
Total long term liabilities
   
37,271
     
21,707
     
22,857
     
41,965
     
41,899
 
Total liabilities
   
18,704,409
     
14,756,743
     
24,108,547
     
29,008,034
     
18,721,590
 
                                         
Total stockholders’ equity
   
34,354,830
     
52,265,472
     
60,821,657
     
72,761,751
     
82,131,604
 

 
23

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Winner Medical’s business operations consist of the manufacturing and marketing, research and development of medical dressings and medical disposable products. The Company has seven wholly-owned operating subsidiaries and four joint venture companies. The Company has established several integrated manufacturing and processing lines for its core products. The Company’s product offerings include medical care, wound care, home care products and PurCotton products, a nonwoven fabric made from 100% natural cotton. The Company manufactures its products in China and sells them both in China and abroad in other countries and areas such as Japan, Germany, Italy, the Netherlands, the United Kingdom, Australia, France, South America, Africa, the Middle East and the United States.

The following analysis discusses changes in the financial condition and results of operations at and for the year September 30, 2009 and 2008, and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included elsewhere in this Report.

The Company’s History

Winner Medical Group Inc., formerly known as Birch Enterprises, Inc., HDH Industries, Inc. and Las Vegas Resorts Corporation, was originally incorporated in the State of Nevada in August 1986. From July 1993 until late 2005, the Company’s immediate predecessor, Las Vegas Resorts Corporation, and its predecessors had no meaningful business operations.

On December 16, 2005, Winner Medical Group Inc. and Winner Group Limited entered into a share exchange agreement pursuant to which the stockholders of Winner Group Limited were issued 42,280,840 shares of Winner Medical Group Inc. common stock in exchange for all 1,143,000 shares of Winner Group Limited that were issued and outstanding as of December 16, 2005. In connection with the acquisition transaction, Winner Group Limited became the Company’s wholly-owned subsidiary. Even though, from a legal perspective, Winner Medical Group Inc. was the acquirer in this transaction, Winner Group Limited is treated the acquirer from an accounting perspective. On October 6, 2009, the Company’s board of directors has approved a 1-for -2 reverse stock split of its issued and outstanding common shares and authorized shares.  42,280,840 shares had been restated to 21,140,420 shares in the Company’s financial statements. Upon effectiveness of the reverses stock split, the outstanding and issued shares were approximately 22,363,675 shares, before rounding up of fractional shares.

Winner Medical Group Inc. presently conducts its business operations through its operating subsidiaries located in China and elsewhere.

The Company’s Business Operations

Winner Medical’s present business operations commenced February 1991 and involve the manufacture and marketing of its products primarily out of its facilities in China. The Company generates revenue through domestic (China) and foreign sales of a variety of medical dressings and medical disposables products, such as medical care, wound care, home care products and PurCotton products, a nonwoven fabric made from 100% natural cotton.

The Company has integrated manufacturing lines that provide its clients with the ability to procure certain products from a single supplier. The Company sells its own brand products in the developing countries including China, the Middle East, South America, Africa, and Southeast Asia. In the developed countries where it sells its products, the Company provides its customers with its specialized design, manufacturing and packaging services. When the Company works on this basis, its clients are able to select the design, size, type and scale of the products the Company manufactures for them.

The Company’s board of directors decided it was in its best interest to transfer all the business operations of the Company’s subsidiary Winner Medical & Textile Ltd. Zhuhai, “Winner Zhuhai”, to Winner Industrial (Shenzhen) Co. Ltd. and Winner Medical & Textile Ltd. Jingmen. On February 1, 2008, the Company stopped all the business operations of Winner Zhuhai and filed for the deregistration of Winner Zhuhai with various government authorities in the PRC. As of September 30, 2009, Winner Zhuhai received approvals from various government authorities in the PRC regarding its application for deregistration, except the relevant tax bureau clearance is still on-going.

In October 2008, in order to execute a change of the Company’s marketing strategy in the Middle East Countries, the board of directors of Winner Medical Jordan Ltd., “Winner Jordan”, decided to deregister Winner Jordan. Instead, the Company appointed marketing agents in Jordan for its business in Middle East. The total investment previously put into Winner Jordan was $185,000, representing a 35% ownership of Winner Jordan. There was no operation in Winner Jordan since its establishment in May 2007. The total loss from Winner Jordan, mainly representing the setting-up expense, since its date of incorporation attributable to the Company is approximately US$43,000.

 
24

 

In April 2009, the board of directors of Winner Industries (Shenzhen) Co., Ltd., a wholly-owned subsidiary of the Company, decided to establish a joint venture with Chengdu Likang Industries Co., Ltd. The new joint venture company, Chengdu Winner Likang Medical Appliances Company Limited, has a registered capital of RMB 5 million, or approximately $0.73 million; the total investment from Winner Industries (Shenzhen) Co., Ltd. is RMB 2.45 million, or approximately $0.36 million. Chengdu Winner Likang Medical Appliances Company Limited is 51% owned by Chengdu Likang Industries Co., Ltd., and 49% by Winner Industries (Shenzhen) Co., Ltd.  Chengdu Winner Likang Medical Appliances Company Limited will be engaged in the business of manufacturing and sales of “Winner” brand products to hospitals in Western China, and is expected to begin its operation in the near future.
 
Industry Wide Trends that are Relevant to the Company’s Business

The medical dressings and medical disposables manufacturing market are continually evolving due to technological advances and new demands in the healthcare industry. The Company believes the trends in the industry towards improving medical care and patient conditions, changes in patient treatment approaches and technological advances will impact favorably on the demand for its products. The Company anticipates that these factors will result in growth in sales of medical dressings and medical disposables products and increased revenue for the Company.

The export of medical dressings and medical disposables products from China has grown rapidly over the last few years. The Company believes that its sales over the next five years will grow in correlation to the growth of medical dressings and medical disposables export volume from China.

The medical dressings and medical disposables market is subject to consumption patterns and trends. One such trend or consumption pattern relates to the age demographics of the end users of the Company’s products. On average, the worldwide population is aging and life spans are generally increasing. As the general population begins to include a larger percentage of older people, the Company anticipates that more medical care will be required, and that will result in increased sales of the Company’s products.

Another trend or consumption pattern in the Company’s industry is that hospitals are increasingly seeking to reduce their costs. One method hospitals employ to reduce costs is to seek alternative products that increase efficiency or reduce labor costs. For example, disposable catheters may reduce the need for frequent changes of diapers and bed sheets. Other popular disposable products used by hospitals to reduce operating costs include Eustachian tubes and needles, disposable clothing and accessories. The Company believes the demand for cost-effective products and healthcare solutions and an increasing emphasis on health in the U.S. and European Union will bring an increase in the demand for medical instruments, medical dressings and medical disposables products.

Also affecting the Company’s industry is the growing trend towards protecting the environment. Consumers are becoming increasingly concerned about the environmental impact of the products they buy. Nonwoven medical dressings, medical instruments and medical disposables products usually contain materials like rubber and polyester, which may result in restrictions on these products under environmental protection regulations which may negatively affect sales of these products. Moreover, such materials are non-biodegradable and exploit petroleum, a non-renewable energy resource. The Company believes this trend will benefit the Company in competing with its competitors because its new PurCotton products are primarily made of natural cotton, which is an environmentally friendly raw material, and the Company’s new nonwoven fabric manufacturing capabilities enables it to make new products with natural cotton at lower costs. The Company believes PurCotton products are a medium- to long-term growth contributor to its revenue, because they can be applied to the medical industry as well as to other consumer products.
 
The Company believes that there is a trend in its industry that is resulting in the geographical shift in product manufacturing from countries with high labor and manufacturing costs to countries, such as China, where labor and manufacturing costs are generally lower. As a result of the lower cost structure and rapid development of the Chinese economy, more foreign multinational companies are entering the Chinese market to produce their goods as China emerges as part of the global production and supply chain. The Company anticipates that this trend of large multinational companies seeking to produce their products in China will benefit the Company. In addition, the Company is negotiating with several large companies in the industry in developed countries which intend to outsource some of their production lines.

Finally, the Company estimates that China’s local market demand for medical dressings and medical disposables products will continue to grow. This presents a significant opportunity for the Company. The Company is developing distribution network to capture opportunities in China, mainly through local distributors, over-the-counter drugstore chains, and direct sales to hospitals.

 Competition

The Company competes based upon manufacturing capacity, product quality, product cost, ability to produce a diverse range of products and logistical capabilities.

 
25

 

The Company encounters significant competition within China and throughout the world. Some of the Company’s competitors have greater financial resources, additional human resources, and more established market recognition in both domestic and international markets than the Company does. However, the Company believes that its China-based competitors have lower labor costs, but their products often lack diversity. With respect to the Company’s competitors located outside China, it believes competitors in India generally utilize older equipment to manufacture their products, resulting in lower product quality. The Company’s competition in Europe and North and South America may have a geographic advantage in the European Union and U.S. markets, but the Company believes they are generally manufacturing on a smaller scale, have less product diversity and higher production costs.

The Company’s competitive advantages

Customers in the medical field employ high quality standards, since product quality and safety are their primary consideration.  They will undergo strict factory and production system verification and product quality testing on their target suppliers. Once a supplier passed their test, it is costly for the customers to switch to others.  Compared with the Company’s competitors, its competitive advantages include the following:

- Sound quality management system and certificates obtained. The Company has already established three quality management systems, ISO9001:2000 quality management system, ISO13485:2003 medical devices quality control system, and 21CFR Part 820 U.S. FDA (United States Food and Drug Administration) Medical Device Quality System Regulation. Also, the Company is proud to be one of the few to receive FDA approval to export sterilized products to the US directly. Currently, over 90% of the Company’s products have obtained European Union CE certificates. There are also 30 types of products registered and listed with the FDA in the US, among those are the sterilization pouches and face masks that have got 510K (US FDA) certificates. The Japanese certificates, which are awarded to individual factories, have been granted to the Company’s Shenzhen factory, Jiayu factory, and Chongyang factory, which are factories qualified and entitled to export products to Japan.

- Quality control on vertically integrated production capacities. The Company has shaped its integrated manufacturing lines to meet client preferences of procuring a range of products from a single trusted supplier. The Company’s services range from raw material processing, bleaching, folding, packaging and sterilization to finished product delivery. They are adamant about maintaining stringent quality control throughout each stage. The Company has factories in Hubei, Shenzhen and Shanghai, production plants in Hubei province are primarily focused on upstream manufacturing, and the facilities in Shenzhen are focused on higher value-added processing to finished products.

- Innovation. The Company is dedicated to invest in research and development to drive innovation. The focus is on the PurCotton manufacturing process to improve product quality and enhance efficiency, and also continuing to expand PurCotton line through line extensions and value-added features. The Company has already obtained invention patent in China, the U.S., Russia, Singapore, South Africa, and 34 member states of the European Patent Office for the invention of spunlace cotton nonwoven manufacture process.

The Company’s strategy against current economic crisis

Due to the current economic crisis, the prices of all raw materials such as petroleum and cotton decreased; as a result, some of the Company’s customers requested the Company to decrease the prices for most of its product lines. Following is the Company’s strategy to address this challenge:

 - Focus on higher margin products. As its long term plan, the Company is executing a systematic plan for the marketing and sales of PurCotton products, which have a higher margin than its traditional products. Even though it experienced low margins during the initial stage of the PurCotton product launch, the Company believes it will generate a higher margin than its traditional products once PurCotton products commence mass production. At the same time, the Company is working on equipment technical improvements at Winner Huanggang to increase production efficiency.

- Implement lean production and equipment technical improvements. The Company implements lean production management and equipment technical improvements among all subsidiaries to eliminate waste during production and increase efficiency.

- Purchase price decreases across the raw materials from the Company’s suppliers. The Company tries its best efforts to maintain good relationships with its major suppliers and obtain as much lower prices as possible.

- Control administrative expense. The Company will continue to optimize the Enterprise Resources Planning, “ERP”, software provided by Systems Applications and Products Company, “SAP”, which enables the Company to reduce its administrative staff, and thus lower its administrative expenses.

- Optimize resource allocation. The Company aims to reduce production costs and administrative and transportation expenses and optimize resource allocation. For instance, due to the limited production and operational area, the Company’s wholly-owned subsidiary, Winner Medical & Textile Ltd. Zhuhai, “Winner Zhuhai”, is not cost effective to further expand its production of certain types of gauze products. To solve this inefficiency of resource utilization, the Company transferred production to Winner Industrial (Shenzhen) Co. Ltd., “Winner Shenzhen,” and Winner Medical & Textile Ltd. Jingmen, “Winner Jingmen”. Zhuhai is now in the final stage of deregistration and there was no production at all during the year.

 
26

 
 
- Reduce labor input. Through improving production techniques, the Company can reduce labor costs and increase efficiency by automation.

Chinese government actions in favor of the Company

- Chinese Medical Reform. The Chinese government’s announced RMB 850 billion healthcare spending in the following three years to reform the healthcare system will greatly improve the accessibility to and desire for medical care. The Chinese government’s increased spending in the medical devices sector is a driving force of the Company’s future development.

- Increased Government Subsidies. During the economic crisis, the Chinese government increased the subsidies to private enterprises to stimulate innovation, research and development, brand promotion and management improvement. The Company has already received and expects to receive some of these government subsidies.

- VAT Tax Reform. The Chinese government reformed its policy on Value Added Taxes, VAT, for purchased machinery. Starting January 1, 2009, the 17% input VAT for machinery is eligible for a reimbursement. This new policy will reduce the Company’s cost on equipment technical improvements and purchase of machineries.

- Tax Rebate Policy. The Chinese State Ministry of Finance and State Ministry of Taxation announced that as of June 1, 2009, the tax rebate rate for exports of medical dressing and related products would be increased by two percent. Effective from June 1, 2009, the tax rebate rate for exports of all the Company’s medical dressing products, and also some types of medical equipment will increase from 13% to 15%; the tax rebate rate for exports of the Company’s plastic and glass products will increase from 11% to 13%.
 
Results of Operations
 
Comparison for the Year Ended September 30, 2009 and 2008

The following sets forth certain of the Company’s income statement information for the years ended September 30, 2009 and 2008.
 
(All amounts, other than percentages, in thousand of U.S. dollars)

   
YEAR ENDED 9/30/09
   
YEAR ENDED 9/30/08
           
Item
 
In
Thousand
 
As a
Percentage
   
In Thousand
 
As a
Percentage
   
Amount
Change
 
% Change
 
Sales Revenue
 
$
98,386
 
100.00
%    
 
$
85,506
 
100.00
%   
 
$
12,880
 
15.06
%
Costs of Goods Sold
 
$
70,444
 
71.60
%
 
$
64,087
 
74.95
%
 
$
6,357
 
9.92
%
Gross profit
   
27,941
 
28.40
%
   
21,419
 
25.05
%
   
6,522
 
30.45
%
Other Operating Income, Net (1)
 
$
1,411
 
1.43
%
 
$
416
 
0.48
%
 
$
995
 
239.18
%
Exchange Difference, Net
 
$
-1,055
 
-1.07
%
 
$
-1,378
 
-1.61
%
 
$
323
 
-23.44
%
Selling, general and administrative expenses
 
$
16,874
 
17.15
%
 
$
14,438
 
16.88
%
 
$
2,436
 
16.87
%
Interest Expense
 
$
459
 
0.47
%
 
$
591
 
0.69
%
 
$
-132
 
-22.34
%
Interest Income
 
$
69
 
0.07
%
 
$
41
 
0.05
%
 
$
28
 
68.29
%
Investment yields
 
$
388
 
0.39
%
 
$
93
 
0.11
%
 
$
295
 
317.20
%
Income tax
 
$
2,358
 
2.39
%
 
$
591
 
0.69
%
 
$
1,767
 
298.98
 %
Minority interest
 
$
65
 
0.07
%
 
$
94
 
0.11
%
 
$
-29
 
-30.85
 %
Net income
 
$
9,129
 
9.28
%
 
$
5,066
 
5.93
%
 
$
4,063
 
80.20
%
(1) Other operating income, net are mainly consists of incomes from the sales of unused raw materials, sales of leftover materials, and the government subsidies.

Segment Information

In fiscal 2009, the Company’s operations were conducted in two operating segments. The Company’s operating decisions, on-site management, internal reporting and performance assessments are conducted within each of the following two identified segments:

·
Traditional Products (Medical Care, Wound Care, Home Care)
·
PurCotton Products

 
27

 
 
The following table summarizes the operating results for fiscal years 2009 and 2008 by segment.
(All amounts, other than percentages, in thousand of U.S. dollars)
   
Traditional Products
(Medical Care, Wound
Care, Home Care)
 
PurCotton Products
   
Consolidated
 
Item
 
2009
 
2008
 
2009
   
2008
   
2009
 
2008
 
Revenue
   
92,917
 
84,147
   
5,468
   
1,359
   
98,386
   
85,506
 
Gross Profit
   
26,490
 
21,324
   
1,452
   
95
   
27,941
   
21,419
 
Income from Operations Before Taxes
   
11,486
 
6,760
   
(65
)
 
(1,197
)
 
11,421
   
5,563
 
Net (loss) income
   
8,931
 
6,263
   
198
   
(1,197
)
 
9,129
   
5,066
 

The following table illustrates the sales revenues from the Company’s business segments for the years ended September 30, 2009 and 2008. The table also provides the percentage of total revenues represented by each listed product type.

 (All amounts, other than percentages, in thousand of U.S. dollars)
   
Year Ended
 on 9/30/09
in Thousand
 
As a
Percentage of 
Total Revenues
   
Year Ended
 on 9/30/08
in Thousand
 
As a
Percentage of
Total Revenues
   
Amount
Change
in Thousand
 
As a
Percentage
Change
 
Traditional Products (Medical care, Wound care, and Home Care)
 
$
92,917
 
94.44
%  
 
$
84,147
 
98.41
% 
 
$
8,770
 
10.42
%
PurCotton Products
 
$
5,468
 
5.56
%
   
1,359
 
1.59
% 
 
$
4,109
 
302.35
Total
 
$
98,386
 
100.00
%
 
$
85,506
 
100.00
%
 
$
12,880
 
15.06
%

Traditional Products Business Segment

Sales revenue from traditional products increased $8,770,000 or 10.42%, to $92,917,000 for the year ended September 30, 2009 from $84,147,000 for the year ended September 30, 2008. This increase was mainly attributable to an increased volume of large sales orders from North and South American customers. The Company has been gradually shifting its resources and services to larger clients. As a result, the Company expects revenue from these significant customers will increase in the future.

PurCotton Products Business Segment

During fiscal year 2009, revenue from PurCotton products increased $4,109,000, or 302.35%, to an amount of $5,468,000 for the year ended September 30, 2009 from $1,359,000 for the year ended on September 30, 2008. Such sales were mainly from the selling of PurCotton jumbo rolls to customers in China, the U.S., Europe and Japan who produce consumer products, including sanitary and incontinence products. The Company is also processing orders of PurCotton finished medical products, such as operation room towel and sponges, with customers in North America and Europe. As of September 30, 2009, the first two PurCotton manufacturing lines are producing in full capacity. Compared to the third quarter, the third manufacturing line has completed testing and started production. In August 2009, the Company entered into a contract with a machine producer in China to purchase new machineries for the fourth production line, these machineries are expected to start production in the second quarter of 2010.

Looking forward, the Company is marketing its own branded PurCotton consumer products such as sanitary products and home care products in China. The Company is confident in its mid to long-term growth potential and believes steady progress has been made to expand the net sales.

 
28

 

Sales by Region
 
The following table illustrates the sales revenues from the major geographic areas in which the Company sells its products for the years ended September 30, 2009 and 2008. The table also provides the percentage of total revenues represented by each listed region.

(All amounts, other than percentages, in thousand of U.S. dollars)
   
Year Ended
 on 9/30/09
in Thousand
 
As a
Percentage of 
Total Revenues
   
Year Ended
 on 9/30/08
in Thousand
 
As a
Percentage of
Total Revenues
 
Amount
Change
in Thousand
 
As a
Percentage
Change
 
                             
Europe
   
      39,599
 
40.25
%
 
40,582
   
47.46
%
     -983
   
-2.42
%
                                   
Japan
   
   17,607
 
17.90
%
 
16,340
   
19.11
%
    1,267
   
7.75
%
                                   
North and South America
   
   18,824
 
19.13
%
 
12,403
   
14.51
%
    6,421
   
51.77
%
                                   
China
   
   16,602
 
16.87
%
 
10,963
   
12.82
%
    5,639
   
51.44
%
                                   
Other
   
    5,753
 
5.85
%
 
5,217
   
6.10
%
      536
   
10.27
%
                                   
Total
   
   98,386
 
100.00
%
 
85,506
   
100.00
%
   12,880
   
15.06
%

Sales Revenue
 
Sales revenue increased $12,880,000, or 15.06%, to $98,386,000 for the year ended September 30, 2009 from $85,506,000 for the year ended on September 30, 2008. This increase was mainly attributable to an increased volume of large sales orders from North and South American customers, Chinese customers, as well as increased sales of PurCotton products. The Company has been gradually shifting its resources and services to larger clients. As a result, the Company expects revenue from these significant customers will increase in the future. The sales revenue to North and South America customers was $18,824,000 for the year ended September 30, 2009, an increase of 51.77% compared to the same period last year.

The net sales to customers in China were $16,602,000 for the years ended September 30, 2009, an increase of 51.44% compared to the same period last year. The Company’s own branded products in China are distributed through hospitals, distributors, and drugstore chains. The Company put great effort in its brand building in China, and its brand is well accepted by its clients and end customers. In April 2009, “Winner” was recognized by the Trademark Office of the Chinese State Administration for Industry and Commerce as a Well-known trademark. The increase of sales in China is also due to the increased demand for face mask and protective gown as a result of swine flu in China.

Other Operating Income, Net

The Company’s other operating income, net, for the year ended September 30, 2009, increased $995,000 to $1,411,000, from $416,000 for the year ended September 30, 2008. Other operating income, net mainly consists of income from unused raw materials, sales of leftover materials, and government subsidies, which are incentives awarded by the PRC local government to the Company. The increase was mainly attributable to the increased sales of leftover materials and government subsidies.

 
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Exchange Difference, Net

The Company’s exchange difference, net, for the year ended September 30, 2009, decreased by $323,000 to a loss of $1,055,000, from a loss of $1,378,000 for the year ended September 30, 2008. The decrease of exchange losses is mainly due to the decreased foreign currency exchange losses recognized from October to December 2008 compared with the same period last year. After its customers placed orders with the Company at an agreed selling price in Euro and US Dollar, the Renminbi (RMB) appreciated against the Euro and US Dollar; as a result, the Company suffered a foreign currency exchange loss on the actual payment date. On December 31, 2008 and 2007, the exchange rates of RMB against Euro were 9.6590 and 10.6669 respectively; the appreciation of RMB against Euro was 10.43%. The exchange rates of RMB against US dollar were 6.8346 and 7.3046 respectively; the appreciation of RMB against US dollar was 6.88% From January to September 2009, the Renminbi (RMB) was relatively stable against foreign currency exchange rate compared with the same period last year.

Cost of Goods Sold

The Company’s cost of goods sold increased $6,357,000 to $70,444,000 for the year ended September 30, 2009 from $64,087,000 for the year ended September 30, 2008. As a percentage of net revenues, the cost of goods sold decreased 3.35% to 71.60% for the year ended September 30, 2009 from 74.95% for the year ended September 30, 2008. The decrease as percentage of revenue was mainly attributable to the unit product cost decrease as a result of the improvement of the Company’s cost control and lean production management that increased production efficiency and reduced production waste.

Gross Profits

The Company’s gross profit increased $6,522,000 to $27,941,000 for the year ended September 30, 2009 from $21,419,000 for the year ended September 30, 2008. Gross profit as a percentage of net revenues was 28.40% for the year ended September 30, 2009, as compared to 25.05% for the year ended September 30, 2008. The increase in gross profit as a percentage of net revenue was mainly due to (1) the improvement of the Company’s cost control, equipment technical improvements and lean production management that increased production efficiency and reduced production waste, (2) the tax rebate rate for exports increased by two percent, and (3) the PurCotton products start making profit during the month of June 2009 compared to losses from these products during the same period last year.

The following table illustrates the gross profits from each product types for the years ended September 30, 2009 and 2008. The table also provides the percentage of total gross profits represented by each product type.

(All amounts, other than percentages, in thousand of U.S. dollars)
   
Year Ended
 on 9/30/09
in Thousand
 
Gross Margin 
   
Year Ended
 on 9/30/08
in Thousand
 
Gross Margin
   
Amount
Change
in Thousand
As a
Percentage
Change
 
Traditional Products (Medical care, Wound care, and Home Care)
 
$
26,489
 
28.51
 
$
21,324
 
25.34
%  
 
$
5,165
24.22
%
PurCotton Products
 
$
1,452
 
26.55
%
   
95
 
6.99
%
 
$
1,357
1428.42
     
  
 
  
     
  
 
  
     
  
  
 
Consolidated Total
 
$
27, 941
 
28.40
%
 
$
21,419
 
25.05
%
 
$
6,522
30.45
%

The gross profit margin for PurCotton Products is 26.55% during the year ended September 30, 2009, mainly attributable to (1) the increase of sales, mainly from the sales of PurCotton jumbo rolls; and (2) the increase of production which results in a decrease of unit cost of good sales.

Selling Expenses

The Company’s selling expenses decreased $146,000 to $6,153,000 for the year ended September 30, 2009 from $6,299,000 for the year ended September 30, 2008. As a percentage of net revenues, the Company’s selling expenses decreased to 6.25% for the year ended September 30, 2009 from 7.37% for the year ended September 30, 2008. The decrease as percentage of revenue was primarily attributable to the decrease of approximately $1,453,000 in transportation expense for export sales compared with the same period last year.

The Company’s transportation expenses for domestic sales, i.e., transportation costs within China, were $1,051,000, 1.07% of total sales, and $862,000, 1.01% of total sales, in fiscal years 2009 and 2008, respectively. The Company’s transportation expenses for export sales were $2,101,000, 2.14% of total sales, and $3,553,000, 4.16% of total sales, in fiscal years 2009 and 2008, respectively. The Company’s transportation fees for export sales decreased by approximately $1,453,000 from fiscal year 2008 to fiscal year 2009 or approximately 40.88%. This decrease in the transportation expenses for export sales was mainly due to the fierce competition of shipping companies.

 
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Administrative Expenses

The Company’s administrative expenses increased $2,583,000, or 31.73%, to $10,721,000 for the year ended September 30, 2009 from $8,138,000 for the year ended September 30, 2008. As a percentage of net revenues, administrative expenses increased to 10.90% for the year ended September 30, 2009 from 9.52% for the year ended September 30, 2008. This increase was primarily attributable to increase in salary for the management and administrative staff compared with the same period last year, and an increase of approximately $260,000 related to implementation of Sarbanes-Oxley 404 compliance project expenses and consulting expenses for brand building projects.

Interest Expenses

Interest expenses decreased to approximately $459,000, 0.47% of the total revenue, for the year ended September 30, 2009 as compared to approximately $591,000, 0.69% of total revenue, for the same period of 2008, a decrease of approximately $132,000, or 22.34%. The Company’s interest expense relates to bank loans which are primarily used to maintain daily operation. The percentage decrease of interest expense was mainly due to (1) a decrease in the Company’s comparatively low average outstanding balance of bank loans of approximately $6,589,000 as of September 30, 2009, compared with approximately $15,033,000 as of September 30, 2008, and (2) decreased interest rates of bank loans.

Income taxes

Effective on January 1, 2008, the PRC Enterprise Income Tax Law, or EIT Law, and Implementing Rules impose a unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in China, unless they qualify under certain limited exceptions. As such, starting from January 1, 2008, three of the Company’s subsidiaries in China, including Winner Medical & Textile Ltd., Jingmen, Winner Medical & Textile Ltd. Jiayu, and Winner Medical & Textile Ltd. Yichang, are subject to an enterprise income tax rate of 25%.

The EIT Law gives existing foreign investment enterprises a five-year grandfather period, during which they can continue to enjoy their existing preferential tax treatments. For foreign investment enterprises that currently enjoy full exemption from PRC enterprise income tax for two years starting from the first profit-making year, followed by a 50% tax exemption for the next three years, the tax holidays are still valid. Four of the Company’s PRC subsidiaries, Winner Medical (Huanggang) Co., Ltd., Winner Medical & Textile Ltd. Chongyang, Hubei Winner Textiles Co., Ltd., and Shanghai Winner Medical Apparatus Co., Ltd. are each entitled to a two-year exemption from enterprise income tax and a reduced enterprise income tax rate for the three years following its second profitable year. The following table sets forth the tax rates applicable to the Company’s PRC subsidiaries that enjoy existing preferential tax treatments.

   
Calendar year end December 31
 
   
2009
   
2010
   
2011
   
2012
   
2013
 
                               
Winner Medical (Huanggang) Co., Ltd.
    0 %     12.5 %     12.5 %     12.5 %     25 %
Winner Medical & Textile Ltd. Chongyang
    12.5 %     12.5 %     25 %     25 %     25 %
Hubei Winner Textiles Co., Ltd.
 
12.5% to 25
%      25 %     25 %     25 %     25 %
Shanghai Winner Medical Apparatus Co., Ltd.
    12.5 %     12.5 %     12.5 %     25 %     25 %

In October 2006, for the purpose of improving operation efficiency, Hubei Winner Textiles Co., Ltd., “Winner Hubei”, merged with Winner Medical & Textile Ltd. Tianmen, “Winner Tianmen”. Income from Winner Hubei and Winner Tianmen was separately reported to the local tax office to reflect the different tax incentive status enjoyed by each entity. The applicable income tax rate for Winner Hubei and Winner Tianmen was 12.5% and 25% for calendar year 2009. The preferential tax incentives will expire at the end of 2009.

On June 27, 2009, Winner Shenzhen obtained the High and New Technology Enterprise Certificate which will be evaluated by the government authorities every 3 years. As a result of this new status, Winner Shenzhen can enjoy a 15% income tax rate in 2009, 2010 and 2011. For year 2012 and 2013, the tax rate will be subject to whether Winner Shenzhen can obtain the High and New Technology Enterprise Certificate status.

Winner Medical (Hong Kong) Limited was incorporated in January 2008 and the applicable statutory tax rate is 16.5%.

 
31

 

No provision for US tax is made as the Company has no assessable income in the US for the year ended September 30, 2009 and 2008. The enterprise income tax of US is 34%.

The Company’s income tax provision for fiscal year ended September 30, 2009 was $2,358,000 as compared to $591,000 for the year ended September 30, 2008. The increase of income tax is mainly due to (1) a change in the tax rate on the Company’s subsidiaries in China, and (2) the cancellation of tax return policy for purchasing domestic machinery.

Minority interest

The Company’s financial statements reflect an adjustment to its consolidated group net income equal to $65,000 and $94,000 in the fiscal years 2009 and 2008, respectively, reflecting third party minority interests in two of the Company’s subsidiaries, 40% in Shanghai Winner Medical Apparatus Co., Ltd., and 40% in Winner Medical (Hong Kong) Limited.

Net income (profit after taxes)

Net profit increased to approximately $9,129,000 for the year ended September 30, 2009 as compared to approximately $5,066,000 for the same period of 2008, an increase of approximately $4,063,000, or approximately 80.20%.  Such increase is mainly attributable to (1) the PurCotton products start making profit from June, 2009 compared to losses from these products for the same period of 2008, (2) the Company’s improved production management to reduce manufacture unit cost and improved production efficiency and (3) relatively stable RMB against foreign currency exchange rate since calendar year 2009.