F-1/A 1 formf-1a.htm

 

As filed with the U.S. Securities and Exchange Commission on May 14, 2021

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM F-1

Amendment No. 3

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

Bon Natural Life Limited

(Exact name of Registrant as specified in its charter)

 

Cayman Islands   2833   Not applicable

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

C601, Gazelle Valley, No.69 Jinye Road.

Xi’an Hi-tech Zone, Xi’an, China

0086-29-88318908 x805

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

The Crone Law Group P.C.

500 Fifth Ave, Suite 938

New York, NY 10110

Phone: (646) 861-7891

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

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on the Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. [X]

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

COPIES OF COMMUNICATIONS TO:

 

Mark Crone, Esq.

Joe Laxague, Esq.

The Crone Law Group P.C.

500 Fifth Ave, Suite 938

New York, NY 10110

Phone: (646) 861-7891

Richard I. Anslow, Esq.

David Selengut Esq.

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas

New York, NY 10105

Phone: (212) 370-1300

Fax: (212) 370-7889

 

CALCULATION OF REGISTRATION FEE

 

TITLE OF EACH CLASS OF
SECURITIES TO BE REGISTERED
  AMOUNT TO BE
REGISTERED
   PROPOSED
MAXIMUM
OFFERING PRICE
PER SHARE
  

PROPOSED

MAXIMUM

AGGREGATE

OFFERING PRICE (2)

   AMOUNT OF
REGISTRATION FEE
 
Ordinary Shares, par value $0.0001 per share (3)   2,300,000(1)  $       5.00   $11,500,000   $1,254.65 
Underwriters’ warrants (3)(4)   184,000   $   $   $ 
Ordinary Shares to be issued upon exercise of Underwriters’ warrants(3)   184,000   $5.00   $920,000   $100.37 
Total Registration Fee                 $1,355.02 

 

(1) Includes (a) 2,000,000 ordinary shares; and (b) up to 300,000 ordinary shares that may be purchased by the underwriters pursuant to its option to purchase additional shares.
   
(2) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933.
   
(3) Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include such indeterminate number of additional ordinary shares as may be issued after the date hereof as a result of share splits, share dividends or similar transactions.
   
(4) In accordance with Rule 457(g) under the Securities Act, because the shares of the registrant’s ordinary shares underlying the underwriters’ warrants (“Underwriter Warrants”) are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.

 

 

 

 

 

 

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

 

Subject to Completion, Dated May 14, 2021

 

 

PROSPECTUS

BON NATURAL LIFE LIMITED

 

2,000,000 Ordinary Shares

 

INITIAL PUBLIC OFFERING

 

 

 

This is the initial public offering of Bon Natural Life Limited. We are offering 2,000,000 ordinary shares, par value US$0.0001 per share (the “Shares”). We expect that the initial public offering price of the Shares will be US$5.00 per Share.

 

Prior to this offering, there has been no public market for our ordinary shares. In connection with this offering, we have been approved to list our ordinary shares on the Nasdaq Capital Market under the symbol “BON.”

 

   Offering
Price per Share
  

Underwriting Discounts and

Commissions (1)

   Proceeds to Us,
Before Expenses
 
Per Share  $5.00   $0.40   $4.60 
Total (2)  $10,000,000   $900,000   $9,100,000 

 

(1) See “Underwriting” for additional disclosure regarding underwriting compensation payable by us including a non-accountable expense allowance of 1% of the gross proceeds of the Offering.

 

(2) We have granted the underwriters the right to purchase up to an additional 300,000 Shares to cover over-allotments.

 

The purchase of the securities offered through this prospectus involves a high degree of risk. See section entitled “Risk Factors” starting on page 13.

 

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the Shares against payment in U.S. dollars to purchasers on or about____________, 2021.

 

US Tiger Securities, Inc.

Co-Lead Bookrunning Manager

 

Newbridge Securities Corporation

Co-Lead Bookrunning Manager

 

R. F. Lafferty & Co., Inc.

Joint Lead Bookrunning Manager

 

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Table of Contents

 

  Page
Prospectus Summary 4
Risk Factors 13
Cautionary Note Regarding Forward-Looking Statements And Industry Data 38
Use Of Proceeds 39
Capitalization 40
Dilution 41
Enforceability Of Civil Liabilities 42
Summary Consolidated Financial And Operating Data 12
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 43
Our Industry 60
Business 62
Regulations 74
Management 86
Principal Shareholders 92
Related Party Transactions 93
Description Of Share Capital 94
Shares Eligible For Future Sale 99
Taxation 100
Underwriting 106
Expenses Relating To This Offering 115
Legal Matters 116
Experts 117
Where You Can Find Additional Information 118
Index To Consolidated Financial Statement F-1

 

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

 

Until _____________ 2021, (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

3
 

 

Prospectus Summary

 

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

 

Conventions that Apply to this Prospectus

 

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

 

  “Shares” are to our ordinary shares, par value $0.0001 per share;
     
  “China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan;
     
  “RMB” or “Renminbi” are to the legal currency of the People’s Republic of China;
     
  “Yuan” or “¥” are to the primary unit of account of the Renminbi (RMB), the legal currency of the People’s Republic of China.
     
  “US$,” “U.S. dollars,” “$,” or “dollars” are to the legal currency of the United States;
     
  “Xi’an App-Chem” are to Xi’an App-Chem Bio(Tech) Co., Ltd., an entity incorporated in the PRC or, depending on the context, Xi’an App-Chem Bio(Tech) Co., Ltd. and its subsidiaries; and
     
  “Bon Natural Life,” “the Company,” “we,” “us,” “our company” or “our” are to Bon Natural Life Limited a Cayman Islands corporation, its subsidiaries and its consolidated affiliated entities.
     
  “Xi’an CMIT” are to Xi’an Cell and Molecule Information Technology Limited, our Wholly Foreign-Owned Enterprise incorporated in the PRC
     
  “Tea Essence” are to Tea Essence Limited, our direct wholly owned subsidiary incorporated in Hong Kong.

 

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option. Our reporting currency is the U.S. Dollar. The functional currency of Xi’an App-Chem and of our operating subsidiaries in the PRC is the Renminbi.

 

Our Business

 

Our business focuses on the manufacturing of personal care ingredients, such as plant extracted fragrance compounds to perfume and fragrance manufacturers, natural health supplements such as powder drinks and bioactive food ingredient products mostly used as food additives and nutritional supplements by our customers. The Company is devoted to providing high quality and competitive prices and a stable supply of products and services for the functional food, personal care, natural medicine and other industries. We provide these products and services for third party customers, as well as for our own proprietary brands. With “nourish life with natural essence” as the business concept, and “becoming an innovator (leader) of natural functional ingredients and an integrated supplier of great health industry” as the goal, after more than 14 years of efforts, the company has formed four technology platforms respectively for natural product large-scale separation, natural product safety improvement, natural product activity enhancement, and natural product function compounding. Our products have not been approved as effective in treating or preventing any health conditions and/or diseases by a regulatory agency in the PRC.

 

Our business is operated through Xi’an App-Chem Bio(Tech)Co., Ltd., a corporation formed in the People’s Republic of China in April of 2006. Xi’an App-Chem was listed on National Equities Exchange and Quotations (“NEEQ”) in China on June 8, 2016 and voluntarily ceased the listing on May 31, 2019 to pursue listing on a senior exchange in the United States. The company is located in the state-level Xi’an Hi-tech Development Zone, and operates through nine wholly owned or majority controlled subsidiaries – (i) Shaanxi App-Chem Health Industry Co., Ltd. ( in Chinese “陕西天美健康产业有限公司”); (ii) Shaanxi App-Chem Ag-tech Co., Ltd. ( in Chinese “陕西天美有机农业科技有限公司”); (iii) Xi’an Yanhuang TCM Medical Research and Development Co., Ltd. ( in Chinese “西安炎黄经方医药研发有限公司”); (iv) Balikun Tianmei Bio (Tech) Co., Ltd. ( in Chinese “巴里坤天美生物科技有限公司”); (v) App-Chem Bio (Tech) (Guangzhou) Co., Ltd. (in Chinese “天美生物科技(广州)有限公司”); (vi) Tongchuan Dietary Therapy Health Technology Co., Ltd. (in Chinese “铜川膳方家健康科技有限公司”); (vii) Xi’an Dietary Therapy Health Management Co., Ltd. (in Chinese “西安膳方家健康管理有限公司”); (viii) Tianjin Yonghexiang Bio (Tech) Co., Ltd. ( in Chinese “天津雍和祥生物科技有限公司”) and (ix) Gansu Baimeikang Bioengineering Co., Ltd. ( in Chinese “甘肃百美康生物工程有限公司”). Our industry and commercial focus is sometimes referred to as the “Great Health” or “Big Health” space. As opposed to conventional medicine focused on pharmaceutical drugs and hospital procedures, these terms refer to the use of natural ingredients intended to promote well-being throughout the human life cycle.

 

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Value chain analysis

 

 

The upstream of the natural ingredient and nutritional supplement market and the flavor and fragrance market in the PRC mainly refers to raw material suppliers, such as natural plants and fruit farms, which provide plant tissues, roots, leaves and fruits to be used for the manufacture of various products for these industries.

 

Midstream manufacturers, such as Bon Natural Life, though our operating companies in China, procure raw materials through direct purchases or dealers and produce natural ingredients and nutritional supplements as well as plant-compounds for fragrance and perfume manufacturers.

 

Our products are then sold to various downstream food and beverage, and fragrance and perfume manufacturers, mostly in the PRC, but also abroad to customers such as International Flavor & Fragrance, Inc, Mars Wrigley, Fridal, Syrimise AG, and others. Using our products as part of their ingredients, downstream food and beverage producers and fragrance will produce finished products, such as food and beverage additives, nutritional supplements, and fragrance that eventually get sold to end-consumers.

 

Our Strengths

 

Innovation in Manufacturing Methods and Product Development

 

  Xi’an App-Chem is a supplier of personal care ingredients, and we seek to be a leader in the bio-manufacturing of natural products and health solutions in immunity and digestion by leveraging our proprietary natural essence extraction technology to focus on human micro-biome as a therapeutic target. Together with our operating subsidiaries, we hold several patents issued by the PRC, relating primarily to composition and processing techniques for products and product ingredients.
     
  We use bio-manufacturing technology to produce substances such as sclareol, sclareolide, ambroxide, extracted from Clary sage (Salvia sclarea L.), a very aromatic herbaceous plant, to replace ambergris (ambroxide is a substitute of ambergris which is originated from sperm whale), novel probiotics stachyose, and natural antioxidant apple polyphenol. Our ambroxide is made using our proprietary technology, which we believe can be done at a lower cost, than the processes used by some of our competitors. Our stachyose manufacturing process features a very high productivity rate (over 1,000-ton capacity), and, we believe, a higher product purity, and faster and more extensive proliferation of probiotics than the primary competing substance, chrysanthemum powder.

 

5
 

 

  Xi’an App-Chem is listed as a key enterprise with ensured supplies in the COVID-19 prevention and control period by various Chinese government agencies during the COVID-19 pandemic due to its immunity boosting products such as stachyose. There is no proven efficacy of Stachyose in preventing, treating or controlling the spread of COVID-19. In its “COVID-19 Treatment Solution-version 7*”, issued on March 3, 2020, China’s National Health Commission recommended the use of supplements regulating the human gut microbiome as one of the potential treatments for COVID-19 patients in critical condition. Xi’an App-Chem, together with other companies in bio-medicine, traditional Chinese medicine, medical equipment, information service devices and system, and PPE manufacturing businesses, was qualified to be listed as a key enterprise in COVID-19 prevention and control for its stachyose products. Stachyose, the main product of Xi’An App-Chem is the major component of the microecological regulator proposed as part of China’s treatment plan for COVID-19. It has been deemed an “important raw and auxiliary material” for pandemic control related drugs and substances, thereby allowing Xi’an App-Chem to meet the qualifications for listing as a key enterprise for the potential prevention and control of the COVID-19 pandemic.
     
    The key enterprise selection for pandemic prevention and control is an institutional system established by a series of policies issued during February and March 2020 by the Chinese government in order to combat COVID-19. The main purpose of these policies is to ensure the stable supply of medical supplies, medicines, key raw materials, and essential living materials during this special period.
     
    The following types of companies are qualified to be listed as key enterprises:

 

  Manufacturers of important medical supplies such as medical masks and non-medical face masks, COVID-19 test kits, infrared thermometers, intelligent monitoring and detection systems, and related drugs and medical equipment that have been requested;
  A key enterprise that produces important daily necessities;
  Important raw and auxiliary material manufacturers, important equipment manufacturers and related supporting enterprises required for the production of the above-mentioned materials;
  An important medical material purchase and storage enterprise;
  Companies that provide relevant information and communication equipment and service systems to respond to the epidemic;
  Enterprises that undertake the above-mentioned material transportation and sales tasks in response to the epidemic; and
  Other enterprises with key guarantees in accordance with the requirements of the State Council’s joint prevention and control mechanism.

 

The advantages of this designation to Xi’an App-Chem include expedited governmental and regulatory approval processes to resume operations, and preferential bank loans with favorable terms.

 

Major supporting measures include:

 

  1. Priority approval of business reopening;
  2. Priority early reopening for the transportation of raw materials and products;
  3. Work and travel support for needed employees;
  4. Working capital support for the key enterprises;
  5. Preferential tax policy support to key enterprises; and
  6. The government’s commitment to the procurement of special protective and medical equipment.

 

(Items 4 and 5 are issued with official government documents; Items 1, 2, 3, and 6 are temporary support measures by local governments at all levels without documentation.)

 

  Our process for manufacturing apple polyphenol (a source of anti-oxidants) allows us to achieve a high product anti-oxidant content of 70% to 90%, higher than some of our competitors’ products.
     
  Xi’an App-Chem launched new over-the-counter products, including Bon Natural Micro-eco Hair Repair Shampoo and Tianmei Jinghao Nutrition Powder. In addition, the Company is in the development stage of more innovative products using natural, functional ingredients intended for the precise regulation and control of the humane micro-biome. Examples include our DuiJiuDangGe (JiuGe) and Gout Ease (Feng Qing Ping).

 

A Stable Supply Chain for Raw Materials for the Fragrance, Food and Beverage Industries

 

  Xi’an App-Chem seeks to have a stable supply chain for raw materials, which is important in the natural ingredient field. The company’s management team, through its operating experience, is constantly improving their selection of various natural raw material sources, supply chain management, supplier selection, and risk and quality control.

 

Advantages in Cost Control

 

  The Company’s management team believes that its bio-manufacturing technology gives it an average cost advantage in producing its natural ingredients (i.e., products such as Ambroxide, stachyose, apple polyphenol and other types of natural-ingredient products).

 

Professional and Efficient Sales Team and Branding

 

  There are twelve people in our sales team, among whom four have professional backgrounds in biology, chemistry, medicine, pharmacy, and related fields. Six of our sales professionals majored in English, international trade and related fields. Our sales professionals have an average of over five years of relevant work experience. Two of them have been stationed abroad to work on a long-term basis. With more than ten years of accumulated experience, we have forged a sales system worldwide (mainly in Europe, East Asia, and North America).

 

Our Challenges

 

We May Face Competition from Other Companies Currently In Other Categories of the Natural Ingredients and Health Solutions Industry.

 

  Because of the and recent growth of our existing business, we may face new direct competition from some counterparts engaged in other categories of the natural products and ingredients business, such as Chenguang Biotech from China, which is engaged in natural colors, Layn, which engaged in natural sweeteners, and European companies like Koninklijke DSM N.V., Symrise AG, and Givaudan SA. These firms may seek to compete directly with Xi’an App-Chem in its existing businesses. The size, financial strength, technology foundation and development capabilities of the above-mentioned companies are strong, and potential competition from these firms will be a key competitive challenge in the near future.

 

Larger, more Developed Food and Ingredient Companies May Seek to Compete in Our Industry in the Near Future.

 

  The rapid development of human micro-biome technology has resulted in rapid commercialization in the related products of immune health and digestive health, which has increasingly attracted the attention of some large-scale companies. For example, the French large-scale food company Danone Group recently announced that it continues to place the gut and its micro-biome at the core of its health strategy to deliver the company’s mission “bringing health through food to as many people as possible.” Such large companies might change the current landscape of the industry, either directly or through mergers and acquisitions. These companies may challenge us by seeking to secure key raw material sources for their products and to acquire stability, reliability and cost advantages for their supply chains. Because of the strong capital and brand strength of such companies, they might pose challenges to us in the future.

 

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We May Face Additional Competition from New Entrants to the Health Industry

 

  The Big Health industry has experienced sustained and rapid growth worldwide, based on the rapid development of information technology and life science technology in recent years. Prompted by the serious emergency caused by the global COVID-19, consumers and public administrators around the world have paid more attention to basic health issues than ever before, especially to immune health. At the core of immune health, and at the core of our business focus, is the precise adjustment and control of human micro-biome by natural probiotics. This area has drawn a wide external attention, which may cause firms outside the health industry to seek market entry. In the future, some of the new entrants may become our competitive challengers.

 

Our Current Sales and Distribution Network May Be Insufficient to Support Our Planned Growth.

 

  We currently sell our products through our direct sales force and distribution channel. Although our sales and distribution network is sufficient for our existing needs, it may be insufficient to meet future product demand as we continue to grow our business. As we begin to expand our production capacity, an insufficient distribution network may hinder our ability to meet demand and to grow our revenues accordingly.

 

Our Strategy for Meeting Potential Challenges

 

  First, we intend to meet our possible competitive challenges by giving full play to our advantages (mainly technology, products, and supply chain) to attain greater advantage in terms of quality, cost, and supply stability. We intend to use these advantages to secure a larger market share and to boost our rapid development and expansion of our capabilities. Due to the high technical barriers to entry in our field, including the complexity of the raw materials involved and the inherent product quality challenges, we believe potential competitors seeking to enter our market will require three to five years to enter the market and launch truly competitive products. We believe this will allow us to press our advantages described above and stay ahead of new competition.
     
  Second, using the capital raised in this offering, we intend to accelerate our business growth and market expansion, taking full advantage of rapid industrial advancements empowered by information technology and life science technology. Our improved financial strength after a successful equity offering, combined with a sustained growth of market demand in the Big Health industry (driven in part by the COVID-19 pandemic), will enhance our ability to tackle various challenges.
     
  Third, we will actively seek opportunities for collaboration and cooperation with large-scale enterprises that focus on human micro-biome-related businesses (such as Guangzhou Wanglaoji Pharmaceutical, JDB, Wahaha, Mengniu, Yili, Chr. Hansen, etc.), including cooperation in product sales, strategic business relationships, and, if possible, equity investment.
     
  Fourth, we intend to invest some of our available cash generated from operations and capital raising to add additional teams to our direct sales force, to expand our geographic reach with new distribution channels into other provinces within China and overseas, and to establish more sales online.

 

We also face other challenges, risks and uncertainties that may materially and adversely affect our business, financial condition, results of operations and prospects. You should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in our Shares.

 

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Corporate History and Structure

 

We commenced our natural products and ingredients business through Xi’an App-Chem Bio(Tech) Co., Ltd. (“Xi’an App-Chem”), a corporation formed in the People’s Republic of China in April of 2006. On April 23, 2006, Xi’an App-Chem received its Business License (Registration No.: 6101012116403) from the Xi’an Administration for Industry and Commerce.

 

On December 11, 2019, Bon Natural Life Limited was incorporated under the laws of the Cayman Islands as our offshore holding company to facilitate financing and offshore listing. Bon Natural Life Limited subsequently established a Wholly Foreign-Owned Enterprise (“WOFE”) in PRC China, Xi’an CMIT Information and Technology Co., Ltd. (“Xi’an CMIT”). Xi’an CMIT is wholly owned by our direct subsidiary in Hong Kong, Tea Essence. Due to PRC legal restrictions on foreign ownership in companies that engage in online sales China, we carry out our business through Xi’an App-Chem, a domestic PRC company, the equity interests in which are held by PRC citizens. Xi’an CMIT entered into a series of contractual arrangements, including a Loan Agreement, an Exclusive Service Agreement, a Shares Pledge Agreement, an Exclusive Option Agreement, and a Proxy Agreement and Power of Attorney, with Xi’an App-Chem and its shareholders, and obtained spousal consent letters by the spouses of the shareholders of Xi’an App-Chem on May 28, 2020. These shareholders are Yongwei Hu, Jing Liu, Wei Wang, Jianli Liu, Fangfang Dong, Kai Zhang, Huixia Guan, Yizhen Jia, Yanna An, and Weihua Liu, collectively holding 100% of equity interest in Xi’an App-Chem.

 

As a result of these contractual arrangements, we have effective control over, and are the primary beneficiary of, Xi’an App-Chem. Xi’an App-Chem is therefore our consolidated variable interest entity, or consolidated VIE, which generally refers to an entity in which we do not have any equity interests but whose financial results are consolidated into our consolidated financial statements in accordance with U.S. GAAP because we have effective financial control over, and are the primary beneficiary of, that entity. We treat Xi’an App-Chem and its subsidiaries as our consolidated affiliated entities under U.S. GAAP and have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP. However, those contractual arrangements may not be as effective in providing operational control as direct ownership. The shareholders of Xi’an App-Chem may have potential conflicts of interest with us. These shareholders may breach, or cause our variable interest entity to breach, or refuse to renew, the existing contractual arrangements we have with them and our variable interest entity, which would have a material and adverse effect on our ability to effectively control our variable interest entity and receive economic benefits from it. For more information, please see “Risk Factors—Risks Related to Our Corporate Structure” and “Risk Factors—Risks Related to Doing Business in China.”

 

The following diagram illustrates our corporate structure, including our subsidiary, the VIE, and the VIE’s subsidiaries, as of the date of this prospectus:

 

 

Note: Shareholders of Xi’an App-Chem are Yongwei Hu, Jin Liu, Wei Wang, Jianli Liu, Fangfang Dong, Kai Zhang, Huixia Guan, Yizhen Jia, Yanna An, and Weihua Liu.

 

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Corporate Information

 

Our address is C601, Gazelle Valley, No.69 Jinye RD.Xi’an Hi-tech Zone, Xi’an, China. Our phone number is 0086-29-88318908 x.805. Our website is http://www.bnlus.com. Information contained on, or available through, our website does not constitute part of, and is not deemed incorporated by reference into, this prospectus. Our registered office in the Cayman Islands is located at the Office of Sertus Incorporations (Cayman) Limited, Sertus Chambers, Governors Square, Suite # 5-204, 23 Lime Tree Bay Avenue, P.O. Box 2547, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is The Crone Law Group P.C., 500 Fifth Ave, Suite 938, New York, NY 10110.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our Shares that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 

Implications of Our Foreign Private Issuers Status

 

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

 

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the Nasdaq Stock Exchange. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.

 

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Impact of the Covid-19 Pandemic

 

In December 2019, a novel strain of coronavirus was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. In response to the COVID-19 outbreak, governments around the global have implemented measures such as lockdowns, travel restrictions, and closures of businesses and schools.

 

Due to the outbreak and spread of COVID-19, in the beginning of February 2020, we had to temporary suspend our manufacturing and sales activities due to government restrictions on business activities. During the temporary business closure period, our employees had very limited access to our manufacturing facilities, and as a result, we experienced difficulty delivering our products to our customers on a timely basis. In addition, due to the COVID-19 outbreak, some of our customers or suppliers may experience financial distress, delay or default on their payments, reduce the scale of their business, or suffer disruptions in their business due to the outbreak. Any increased difficulty in collecting accounts receivable, delayed raw materials supply, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic conditions could negatively impact our results of operations. The Company resumed its business activities to normal since March 2, 2020 and has received and fulfilled an increasing number of customer orders since then, especially for its bioactive food ingredient products, including Stachyose, due to local government’s recommendation which led to increased consumer demand. As a result the Company’s total revenues and net income for the year ended September 30, 2020 increased by approximately 11.1% and 20.9%, respectively, as compared to fiscal year 2019, to approximately $18.22 million and $3.10 million, respectively. Therefore, the Company believes that the negative impact of the COVID-19 outbreak on its business was temporary.

 

Our assets primarily include cash, accounts receivable, inventories, prepaid expense and other current assets, property, plant and equipment and intangible assets. As of September 30, 2020, our total current assets amounted to approximately $10.84 million, and our total assets amounted to approximately $25.20 million. Nothing came to our attention that would cause us to believe that the COVID-19 outbreak had negatively impacted our current and total assets, as compared to the September 30, 2019 balance.

 

As of the date of this prospectus, the COVID-19 outbreak in China appears to have slowed down and most provinces and cities have resumed some business activities under the guidance and support of the government; however, the extent of the impact of COVID-19 on our business, operational and financial performance will depend on certain developments including the duration of the outbreak, the possibility of a second wave of infections and future demand for our products. Today, while our offices and manufacturing facilities remain open and business activities have fully resumed, we are closely monitoring all developments and are following the guidelines issued by local and national health authorities. We strive to accommodate and support our employees, while also maintaining our commitments to our customers. We expect the aforementioned negative impact will gradually mitigate in the future as the COVID-19 outbreak continues to become more controlled in China. Nevertheless, due to the uncertainty on future developments, which cannot be predicted with confidence at this time, we are not able to assess the overall or long-term effect the COVID-19 outbreak may have on our financial results and business operations. Although we believe the adverse market conditions will continue to affect our business, results of operations, financial conditions and liquidity in the near-term, we are confident that our ongoing efforts to mitigate the negative impacts of COVID-19 will help us assure our growth aspects in the long run.

 

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The Offering

 

Securities Being Offered   2,000,000 Shares (or 2,300,000 Shares if the underwriters exercise their over-allotment option in full).
     
Offering Price   $5.00 per Share.  
     
Securities Issued and to be Issued   5,800,000 of our ordinary shares are issued and outstanding as of the date of this prospectus.
     
Number of Shares Outstanding After the Offering If All the Shares Are Sold   A total of 7,800,000 Shares will be issued and outstanding following the close of this offering (or 8,100,000 Shares if the underwriters exercise their over-allotment option in full). In addition, we have agreed to issue warrants to the representative of the underwriters to purchase a number of ordinary shares equal to 8% of the total number of ordinary shares sold in this offering at a price equal to the offering price, exercisable for five years. As a result, warrants to purchase up to 160,000 ordinary shares (or 184,000 shares if the underwriters exercise their over-allotment option in full) will be outstanding following the close of this offering.
     
Use of Proceeds   Our proceeds from this offering will be approximately $9,100,000 before expenses. We intend to use these proceeds for working capital, to expand our sales network, research and development, and to expand our production capacity. Please see “Use of Proceeds” for additional information.
     
Lock-up   We, our directors, officers and our existing shareholders holding 5% or more of our ordinary shares, subject to certain exceptions, have agreed with the underwriters not to sell, transfer or dispose of any ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sales” and “Underwriting.”
     
Listing   We have been approved to list our ordinary shares on the Nasdaq Capital Market under the symbol “BON” in connection with this offering. Our Shares and shares will not be listed on any other stock exchange or traded on any automated quotation system.

  

Significant Risk Factors

 

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

 

Competition. Because of the strong prospects and recent growth of our existing business, we may face new direct competition from some counterparts engaged in other categories of the natural products and ingredients business, such as Chenguang Biotech from China, which is engaged in natural colors, Layn, which engaged in natural sweeteners, and European counterparts like Koninklijke DSM N.V., Symrise AG, and Givaudan SA. These firms may seek to compete directly with Xi’an App-Chem in its existing businesses to some extent. The size, financial strength, technology foundation and development capabilities of the above-mentioned companies are strong, and potential competition from these firms will be a key competitive challenge in the near future. In addition, large and well-developed food and food ingredient companies may seek to enter the nutritional health space. These companies may challenge us by seeking to secure key raw material sources for their products and to acquire stability, reliability and cost advantages for their supply chains. Because of the strong capital and brand strength of such companies, they might pose challenges to us in the future. If we are unable to continue to expand, innovate, and collaborate to improve our market position in the face of new competition, our market share, revenues, and profitability will be adversely affected.

 

Need for substantial additional financing, including the financing sought in this offering. Our plans for business expansion and development are dependent upon our raising significant additional capital, including the capital sought in this offering. Our plans call for significant new investments in research and development, marketing, expanded productions capacity, and working capital for raw materials and other items. Management estimates that our capital needs for expansion will be approximately $15 million. Although we expect the proceeds of this offering and our net earnings to substantially fund our planned growth and development, our management will be required to properly and carefully administer and allocate these funds. Should our capital needs be higher than estimated, or should additional capital be required after the close of this offering, we will be required to seek additional investments, loans or debt financing to fully pursue our business plans. Such additional investment may not be available to us on terms which are favorable or acceptable. Should we be unable to meet our full capital needs, our ability to fully implement our business plan will be impaired.

 

Reliance on contractual arrangements with our variable interest entity. We have relied and expect to continue to rely on contractual arrangements with Xi’an App-Chem and its shareholders to operate our business. For a description of these contractual arrangements, see “Corporate and Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our variable interest entity. For example, our variable interest entity and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct its operations in an acceptable manner or taking other actions that are detrimental to our interests.

 

If we had direct ownership of Xi’an App-Chem, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Xi’an App-Chem, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our variable interest entity and its shareholders of their obligations under the contracts to exercise control over our variable interest entity. The shareholders of our consolidated variable interest entity may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portion of our business through the contractual arrangements with our variable interest entity. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with our variable interest entity may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

 

Our products have not been clinically proven to be safe or effective, and our quality control efforts are limited to ensuring ingredient and product purity and certain safety measures. Our products include nutritional supplements that are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Some of our products contain innovative ingredients or combinations of ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience with human consumption of certain of these product ingredients or combinations of ingredients in concentrated form. We have not conducted clinical trials on the safety or efficacy of our products, and no government agency with authority has made any determination regarding their safety or efficacy. Our inspection and quality control efforts are limited to ensuring ingredient and product purity and quality. We follow industry best practices by inspecting sourced raw materials and finished products and formulating our products and in accordance to “ISO22000 Food Safety Management System-Procurement Control Procedure”, “People’s Republic of China National Standard-Powder Drink”, and “People’s Republic of China Domestic Trade Industry Standard-Tablet Candy”. In addition to our self-inspections, we use authorized national food quality control and safety inspection agencies to inspect our raw materials and finished products. These inspections and practices, however, do not constitute proof or assurance that our products are safe or effective. We could be adversely affected in the event that our products, or similar products distributed by other companies, were proven or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers’ use or misuse of our products or similar products of our competitors.

 

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Summary Consolidated Financial and Operating Data

 

The following selected financial data for the years ended September 30, 2020 and 2019 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this selected financial data together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

Balance Sheet Data (Presented in $USD)

 

   As of September 30, 
   2020   2019 
Current assets  $10,840,214   $8,579,432 
Total assets  $25,202,229   $19,560,412 
Current liabilities  $11,696,969   $10,864,350 
Total liabilities  $14,179,220   $12,297,066 
Total equity  $11,023,009   $7,263,346 
Total liabilities and shareholders’ equity  $25,202,229   $19,560,412 

 

Statements of Operations Data (Presented in $USD)

 

   For the years ended September 30, 
   2020   2019 
Revenues  $18,219,959   $16,396,018 
Gross profit  $5,202,313   $5,282,096 
Operating expenses  $1,734,148   $2,106,923 
Income from operations  $3,468,165   $3,175,173 
Other income (expenses)  $186,414   $(185,343)
Provision for income taxes  $556,262   $427,194 
Net income  $3,098,317   $2,562,636 
Earnings per share, basic and diluted  $0.58   $0.50 
Weighted average ordinary shares outstanding   5,210,649    5,166,667 

 

Exchange Rate Information

 

Our financial statements are presented in US Dollars.

 

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Risk Factors

 

An investment in our Shares involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our Shares. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operations. In any such case, the market price of our Shares could decline, and you may lose all or part of your investment.

 

Risks Related To Our Financial Condition and Business Model

 

Our failure to appropriately respond to changing consumer preferences and demand for new products or product enhancements could significantly harm our customer relationships and product sales and harm our financial condition and operating results.

 

Our business is subject to changing consumer trends and preferences, especially with respect to weight management; targeted nutrition; energy, sports, and fitness; and other nutrition products. Our continued success depends in part on our ability to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes. Furthermore, the nutritional supplement industry is characterized by rapid and frequent changes in demand for products and new product introductions and enhancements. Our failure to accurately predict these trends could negatively impact consumer opinion of our products and cause the loss of sales. Our short term new product development primarily focuses on health supplements, such as various powder drink products seeking to i) boost immunity; ii) prevent indigestion; iii) prevent respiratory infection; iv) prevent allergic skin reaction; v) improve sleep quality; vi) prevent memory loss and vii) alleviate anxiety. Our products have not been approved as effective in treating or preventing any health conditions and/or diseases by a regulatory agency in the PRC. In terms of product enhancements, we are also working on increasing the purity of our bioactive food ingredients, such as our ultra-pure stachyose as a dietary supplement for infants, flavanols to seek intestine health improvement, procyanidin b2 to seek to promote hair growth, and high soluble and low residue sclareolide to seek weight management. The success of our new product offerings and enhancements depends upon a number of factors, including our ability to:

 

  accurately anticipate customer needs;
     
  innovate and develop new products or product enhancements that meet these needs;
     
  successfully commercialize new products or product enhancements in a timely manner;
     
  price our products competitively;
     
  manufacture and deliver our products in sufficient volumes and in a timely manner; and
     
  differentiate our product offerings from those of our competitors.

 

If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our product offerings could be rendered obsolete, which could negatively impact our revenues, financial condition and operating results.

 

If we are unable to build sufficient distribution network to meet increasing demand of our products, our ability to execute on our business plan as outlined in this prospectus will be impaired.

 

We sell our products through our direct sales force and distribution channel. Although our sales and distribution satisfy our existing business needs, they might be insufficient to meet demand for our products as we continue to grow our business, which could result in harm to our sales and business operations, financial condition and results of operations. To mitigate such risk, we intent to invest our internally generated cash from operations and capital to be raised to add additional teams to our direct sales force, expand our geographic reach with new distribution channels into other provinces within China and overseas, and establish more sales online. If our planned efforts to expand our sales and distribution channels are not effective, our ability to execute on our business plan and to realize continued growth with be impaired.

 

Production difficulties, quality control problems, inaccurate forecasting and reliance on third-party suppliers could harm our business.

 

Production difficulties, quality control problems, inaccurate forecasting and our reliance on third party suppliers to manufacture and deliver products that meet our specifications in a timely manner could harm our business. We could experience production difficulties with respect to our products, including the availability of raw materials, components, packaging and products that do not meet our specifications and quality control standards. These production difficulties and quality problems could result in stock outages or shortages in our markets with respect to such products, harm our sales, or create inventory write-downs for unusable products.

 

The inability to obtain adequate supplies of raw materials for products at favorable prices, or at all, could have a material adverse effect on our business, financial condition, or results of operations.

 

We acquire our raw materials for the manufacture of our products from third-party suppliers. Materials used in manufacturing our products are purchased through purchase order, often invoking pre-negotiated supply agreements. We have very few long-term agreements for the supply of these materials. There is a risk that any of our suppliers could discontinue selling raw materials to us. Although we believe that we could establish alternate sources for most of our products, any delay in locating and establishing relationships with other sources could result in product shortages or back orders for products, with a resulting loss of net sales. In certain situations, we may be required to alter our products or to substitute different products from another source. There can be no assurance that suppliers will provide the raw materials that are needed by us in the quantities that we request or at the prices that we are willing to pay. Because we do not control the actual production of certain raw materials, we are also subject to delays caused by any interruption in the production of these materials, based on conditions not within our control, including weather, crop conditions, transportation interruptions, strikes by supplier employees, and natural disasters or other catastrophic events.

 

Our products have not been clinically proven to be safe or effective, and our quality control efforts are limited to ensuring ingredient and product purity and certain safety measures. If our products, or similar products distributed by other companies, were prove or asserted to be unsafe or ineffective, our business would be harmed.

 

Our products include nutritional supplements that are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Some of our products contain innovative ingredients or combinations of ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience with human consumption of certain of these product ingredients or combinations of ingredients in concentrated form. We have not conducted clinical trials on the safety or efficacy of our products, and no government agency with authority has made any determination regarding their safety or efficacy. Our inspection and quality control efforts are limited to ensuring ingredient and product purity and quality. We follow industry best practices by inspecting sourced raw materials and finished products and formulating our products and in accordance to “ISO22000 Food Safety Management System-Procurement Control Procedure”, “People’s Republic of China National Standard-Powder Drink”, and “People’s Republic of China Domestic Trade Industry Standard-Tablet Candy”. In addition to our self-inspections, we use authorized national food quality control and safety inspection agencies to inspect our raw materials and finished products. These inspections and practices, however, do not constitute proof or assurance that our products are safe or effective. We could be adversely affected in the event that our products, or similar products distributed by other companies, were proven or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers’ use or misuse of our products or similar products of our competitors.

 

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Disruptions Resulting from the Covid-19 Pandemic Have Had a Material Negative Impact on Our Results of Operations, and Pose Continuing Additional Risks to Our Operations.

 

In December 2019, a novel strain of COVID-19 was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. To reduce the spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak, including, but not limited to, the temporary closure of the Company’s factory and operations beginning in early February, limited support from the Company’s employees, delayed access to raw material supplies and inability to deliver products to customers on a timely basis, the Company’s business was negatively impacted and generated lower revenue and net income during the period from February to April 2020. The Company resumed operations on March 2, 2020 and received and fulfilled an increasing number of customer orders in the second half of fiscal year 2020, especially for bioactive food ingredients, including Stachyose due to local government recommendation and increasing consumer demand. As a result, our revenues increased approximately 11.1% as compared to fiscal year 2019, to approximately $18.22 million. Our net income increased approximately 20.9% as compared to fiscal year 2019, to approximately $3.10 million in fiscal year 2020. Although the negative impact of the COVID-19 coronavirus outbreak on our business seems to be temporary in China, there is still uncertainty both in China and globally and potential disruption to business and the economy. A resurgence could negatively affect the execution of customer contracts, the collection of customer payments, or disruption of the Company’s supply chain. The continued uncertainties associated with COVID 19 may cause the Company’s revenue and cash flows to underperform in the next 12 months. The extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted as of the date of this prospectus.

 

We may face increased competition from new and existing firms with greater capital resources, which could cause our market share and profitability to decline if we do not successfully meet competitive challenges.

 

Because of the strong prospects and recent growth of our existing business, we may face new direct competition from some counterparts engaged in other categories of the natural products and ingredients business, such as Chenguang Biotech from China, which is engaged in natural colors, Layn, which engaged in natural sweeteners, and European counterparts like Koninklijke DSM N.V., Symrise AG, and Givaudan SA. These firms may seek to compete directly with Xi’an App-Chem in its existing businesses to some extent. The size, financial strength, technology foundation and development capabilities of the above-mentioned companies are strong, and potential competition from these firms will be a key competitive challenge in the near future. In addition, large and well-developed food and food ingredient companies may seek to enter the nutritional health space. These companies may challenge us by seeking to secure key raw material sources for their products and to acquire stability, reliability and cost advantages for their supply chains. Because of the strong capital and brand strength of such companies, they might pose challenges to us in the future. If we are unable to continue to expand, innovate, and collaborate to improve our market position in the face of new competition, our market share, revenues, and profitability will be adversely affected.

 

If we do not obtain substantial additional financing, including the financing sought in this offering, our ability to execute on our business plan as outlined in this prospectus will be impaired.

 

Our plans for business expansion and development are dependent upon our raising significant additional capital, including the capital sought in this offering. Our plans call for significant new investments in research and development, marketing, expanded productions capacity, and working capital for raw materials and other items. Management estimates that our capital needs for expansion will be approximately $15 million. Although we expect the proceeds of this offering and our net earnings to substantially fund our planned growth and development, our management will be required to properly and carefully administer and allocate these funds. Should our capital needs be higher than estimated, or should additional capital be required after the close of this offering, we will be required to seek additional investments, loans or debt financing to fully pursue our business plans. Such additional investment may not be available to us on terms which are favorable or acceptable. Should we be unable to meet our full capital needs, our ability to fully implement our business plan will be impaired.

 

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If we are unable to retain key personnel and hire new key personnel, we may not be able to implement our business plan.

 

Our ability to succeed depends upon the experience and contributions of our key personnel, and in particular, our founder and CEO, Mr. Hu. The loss of the services of these individuals, if they are not adequately replaced, could have a substantial adverse effect on our financial condition, results of operations, and prospects. Our future success will also depend on our ability to identify, attract, and retain additional qualified personnel as we expand our operations. There is no guarantee that we will be successful in identifying, attracting, and retaining such personnel. Consequently, the loss of any of those individuals may have a substantial effect on our future success or failure. We may have to recruit qualified personnel with competitive compensation packages, equity participation, and other benefits that may affect the working capital available for our operations. Management may have to seek to obtain outside independent professionals to assist them in assessing the merits and risks of any business proposals as well as assisting in the development and operation of many company projects. No assurance can be given that we will be able to obtain such needed assistance on terms acceptable to us. Our failure to attract additional qualified employees or to retain the services of key personnel could have a material adverse effect on our operating results and financial condition.

 

Because we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.”

 

We are an “emerging growth company” as defined under the Jumpstart our Business Startups Act (“JOBS Act”). We will remain an “emerging growth company” for up to five years, or until the earliest of:

 

  (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1.07 billion,
     
  (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or
     
  (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

 

As an “emerging growth company”, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:

 

  not being required to comply with the auditor attestation requirements of section 404(b) of the Sarbanes-Oxley Act (“Sarbanes Oxley”) (we also will not be subject to the auditor attestation requirements of section 404(b) as long as we are a “smaller reporting company”, which includes issuers that had a public float of less than $75 million as of the last business day of their most recently completed second fiscal quarter);
     
  reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
     
  exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

In addition, section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in section 7(a)(2)(B) of the Securities Act of 1933 (the “Securities Act”) for complying with new or revised accounting standards. Under this provision, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

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Risks Related to Our Corporate Structure

 

If the PRC government finds that the agreements that establish the structure for conducting certain of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations changes in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Xi’an App-Chem, our variable interest entity, is engaged in online product sales with a value-added telecommunications license, and e-commerce business is considered to be a type of value-added telecommunications service under Chinese law and regulations. Foreign investment in the value-added telecommunication services industry in China is extensively regulated and subject to numerous restrictions. Pursuant to the Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2020), or the 2020 Negative List, published by the National Development and Reform Commission, and the Ministry of Commerce, or the MOFCOM, on June 23, 2020, and effective on July 23, 2020, with a few exceptions, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication services provider and any primary foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record.

 

We are a Cayman Islands company and our PRC subsidiary is considered a foreign-invested enterprise. Accordingly, our PRC subsidiary is not eligible to operate value-added telecommunications services in China. To ensure strict compliance with the PRC laws and regulations, we conduct such business activities through Xi’an App-Chem, our consolidated affiliated entity, and its subsidiaries. Xi’an CMIT, our wholly-owned subsidiary in China, has entered into a series of contractual arrangements with Xi’an App-Chem and its shareholders, which enable us to (1) exercise effective control over Xi’an App-Chem, (2) receive substantially all of the economic benefits and absorb substantially all of the economic losses of Xi’an App-Chem, and (3) have an exclusive option to purchase all or part of the shares and assets in Xi’an App-Chem when and to the extent permitted by PRC laws. Because of these contractual arrangements, we have control over and are the primary beneficiary of Xi’an App-Chem and hence consolidate its financial results as our variable interest entity under U.S. GAAP.

 

In the opinion of our PRC counsel, Chamzon Law Firm, (i) the ownership structures of Xi’an CMIT and Xi’an App-Chem, currently do not and immediately after giving effect to this offering will not result in violation of PRC laws and regulations currently in effect; and (ii) the agreements under the contractual arrangements between Xi’an CMIT, Xi’an App-Chem and its shareholders governed by PRC laws are valid, binding and enforceable against each party thereto in accordance with their terms and applicable PRC laws and regulations currently in effect, and do not result in violation of PRC laws or regulations currently in effect,. However, we have been further advised by our PRC counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules. Thus, the PRC regulatory authorities may take a view contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structure will be adopted or if adopted, what they would provide. If the PRC government finds that our contractual arrangements do not comply with its restrictions on foreign investment, or if the PRC government otherwise finds that we, Xi’an App-Chem, or any of its subsidiaries are in violation of PRC laws or regulations or lack the necessary permits or licenses to operate our business, the relevant PRC regulatory authorities, would have broad discretion in dealing with such violations or failures, including, without limitation:

 

  revoking the business licenses and/or operating licenses of such entities;
     
  discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our PRC subsidiary and consolidated affiliated entities;
     
  imposing fines, confiscating the income from our PRC subsidiary or consolidated affiliated entities, or imposing other requirements with which such entities may not be able to comply;
     
  requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our variable interest entity and deregistering the equity pledges of our variable interest entity, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our variable interest entity; or

 

  restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.

 

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Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences result in our inability to direct the activities of our variable interest entity that most significantly impact its economic performance, and/or our failure to receive the economic benefits from our variable interest entity, we may not be able to consolidate the entity in our consolidated financial statements in accordance with U.S. GAAP.

 

We rely on contractual arrangements with our variable interest entity and its shareholders for a substantial portion of our business operations, which may not be as effective as direct ownership in providing operational control.

 

We have relied and expect to continue to rely on contractual arrangements with Xi’an App-Chem and its shareholders to operate our business. For a description of these contractual arrangements, see “Corporate and Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our variable interest entity. For example, our variable interest entity and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct its operations in an acceptable manner or taking other actions that are detrimental to our interests.

 

If we had direct ownership of Xi’an App-Chem, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Xi’an App-Chem, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our variable interest entity and its shareholders of their obligations under the contracts to exercise control over our variable interest entity. The shareholders of our consolidated variable interest entity may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portion of our business through the contractual arrangements with our variable interest entity. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with our variable interest entity may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

 

Any failure by our variable interest entity or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.

 

If our variable interest entity or its shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of Xi’an App-Chem refuse to transfer their equity interest in Xi’an App-Chem to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations. We may not be able to obtain consent and cooperation from all the shareholders in further actions with respect to Xi’an App-Chem, such as the transferring the shareholders’ respective equity interests in Xi’an App-Chem to our designee. In addition, if any third parties claim any interest in such shareholders’ equity interests in Xi’an App-Chem, our ability to exercise shareholders’ rights or foreclose the share pledge according to the contractual arrangements may be impaired. If these or other disputes between the shareholders of our variable interest entity and third parties were to impair our control over Xi’an App-Chem, our ability to consolidate the financial results of our variable interest entity would be affected, which would in turn result in material adverse effect on our business, operations and financial condition. All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our variable interest entity, and our ability to conduct our business may be negatively affected.

 

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The shareholders of our variable interest entity may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The shareholders of Xi’an App-Chem may have potential conflicts of interest with us. These shareholders may breach, or cause our variable interest entity to breach, or refuse to renew, the existing contractual arrangements we have with them and our variable interest entity, which would have a material and adverse effect on our ability to effectively control our variable interest entity and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with Xi’an App-Chem to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

Contractual arrangements in relation to our variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC variable interest entity owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust income of Xi’an App-Chem in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by Xi’an App-Chem for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiary’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on Xi’an App-Chem for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our variable interest entity’s tax liabilities increase or if it is required to pay late payment fees and other penalties.

 

We may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by our variable interest entity, which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain our growth.

 

As part of our contractual arrangements with our variable interest entity, our variable interest entity holds certain assets, licenses and permits that are critical to our business operations, including the Value-added Telecommunications License. The contractual arrangements contain terms that specifically obligate our variable interest entity’s shareholders to ensure the valid existence of the variable interest entity and restrict the disposal of material assets of the variable interest entity. However, in the event the variable interest entity’s shareholders breach the terms of these contractual arrangements and voluntarily liquidate any of our variable interest entity, or our variable interest entity declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of or encumbered without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by the variable interest entity, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, under the contractual arrangements, our variable interest entity may not, in any manner, sell, transfer, mortgage or dispose of their material assets or legal or beneficial interests in the business without our prior consent. If any of our variable interest entity undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of the assets of the variable interest entity, thereby hindering our ability to operate our business as well as constrain our growth.

 

We may lose the ability to use, or otherwise benefit from the patents held by our variable interest entity, which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain our growth.

 

As of September 30, 2020, we had 12 approved patents and 1 pending patent application through our variable interest entity in China, see “Business - Intellectual Property”. The contractual arrangements contain terms that specifically obligate our variable interest entity’s shareholders to ensure the valid existence of the variable interest entity and restrict the disposal of patents of the variable interest entity. However, in the event the PRC government finds that our contractual arrangements do not comply with PRC laws, the relevant PRC regulatory authorities may revoke the patents held by our variable interest entity, or restrict our variable interest entity to license their patents to us, which could have a material adverse effect on our business, financial condition and results of operations. Additionally, in the event the variable interest entity’s shareholders breach the terms of these contractual arrangements and voluntarily liquidate any of our variable interest entity, or our variable interest entity declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of or encumbered without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the patents held by the variable interest entity, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, under the contractual arrangements, our variable interest entity may not, in any manner, sell, transfer, mortgage or dispose of their patents without our prior consent. However, if any of our variable interest entity undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of the patents of the variable interest entity, thereby hindering our ability to operate our business as well as constrain our growth.

 

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Uncertainties exist with respect to the interpretation and implementation of the newly enacted Foreign Investment Law and its implementing rules, and how they may impact our business, financial condition and results of operations.

 

The variable interest entity structure has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. The MOFCOM published a discussion draft of the Proposed Foreign Investment Law in January 2015, or the 2015 Draft FIL, according to which, variable interest entities that are controlled via contractual arrangements would also be deemed as foreign-invested entities, if they are ultimately “controlled” by foreign investors.

 

In March 2019, the PRC National People’s Congress, or the NPC, promulgated the PRC Foreign Investment Law, or the Foreign Investment Law, and in December 2019, the State Council promulgated the Implementing Regulations of the Foreign Investment Law of PRC, or the FIE Implementing Regulations, to further clarify and elaborate the relevant provisions of the Foreign Investment Law. The Foreign Investment Law and the FIE Implementing Regulations both became effective from January 1, 2020 and replaced the major existing laws and regulations governing foreign investment in the PRC. Pursuant to the Foreign Investment Law, “foreign investments” refer to investment activities conducted by foreign investors (including foreign natural persons, foreign enterprises or other foreign organizations) directly or indirectly in the PRC, which include any of the following circumstances: (i) foreign investors setting up foreign-invested enterprises in the PRC solely or jointly with other investors, (ii) foreign investors obtaining shares, equity interests, property portions or other similar rights and interests of enterprises within the PRC, (iii) foreign investors investing in new projects in the PRC solely or jointly with other investors, and (iv) investment in other methods as specified in laws, administrative regulations, or as stipulated by the State Council.

 

The Foreign Investment Law and FIE Implementing Regulations do not introduce the concept of “control” in determining whether a company would be considered as a foreign-invested enterprise, nor do they explicitly provide whether the variable interest entity structure would be deemed as a method of foreign investment. However, the Foreign Investment Law has a catch-all provision that includes into the definition of “foreign investments” made by foreign investors in China in other methods as specified in laws, administrative regulations, or as stipulated by the State Council, and as the Foreign Investment Law and FIE Implementing Regulations are newly adopted and relevant government authorities may promulgate more laws, regulations or rules on the interpretation and implementation of the Foreign Investment Law, the possibility cannot be ruled out that the concept of “control” as stated in the 2015 Draft FIL may be embodied in, or the variable interest entity structure adopted by us may be deemed as a method of foreign investment by, any of such future laws, regulations, and rules.

 

If our variable interest entity is deemed as a foreign-invested enterprise under any of such future laws, regulations, and rules, and any of the businesses that we operate were to be in the “negative list” for foreign investment and therefore be subject to foreign investment restrictions or prohibitions, further actions required to be taken by us under such laws, regulations and rules may materially and adversely affect our business, financial condition and results of operations. Furthermore, if future laws, administrative regulations or rules mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, business, financial condition and results of operations.

 

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Risks Related to Legal Uncertainty and Doing Business in China

 

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

 

All of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

 

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results.

 

We may incur material product liability claims, which could increase our costs and harm our financial condition and operating results.

 

Our ingestible products include milk thistle extracts, apple polyphenol and other ingredients and are classified as foods or raw materials of dietary supplements and, unlike prescription medication, our product formulas are not subject to pre-market regulatory approval with respect to medical efforts in China in which our products are distributed. Our products could contain contaminated substances, and some of our products contain some ingredients that do not have long histories of human consumption. We rely upon published and unpublished safety information including clinical studies on ingredients used in our products. These studies include “Safety and toxicity of silymarin, the major constituent of milk thistle extract: An updated review” [available at https://onlinelibrary.wiley.com/doi/abs/10.1002/ptr.6361], “The toxicology and safety of apple polyphenol extract” [available at https://www.sciencedirect.com/science/article/abs/pii/S0278691504000493?via%3Dihub], “Public Announcement Regarding Haematococcus Pluvialis and Other New Resource Food” [Evaluation Division of Food Safety Standard and Inspection,” No. 17 issued on October 29, 2010] [available at http://www.nhc.gov.cn/sps/s7891/201011/7957c2f1326c4990b5e67ce2d3ceb783.shtml?from=singlemessage&isappinstalled=0] (indicating that Stachyose is a safe ordinary food) and other reports by independent research institutions. In addition, stachyose is permitted for ordinary food production by the Ministry of Health of China. We do not, however, conduct or sponsor clinical studies of our products. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. As a marketer of dietary and nutritional supplements and other products that are ingested by consumers or applied to their bodies, we may be subjected to various product liability claims, including that (i) the products contain contaminants, (ii) the products include inadequate instructions as to their uses, or (iii) the products include inadequate warnings concerning side effects and interactions with other substances. It is possible that widespread product liability claims could increase our costs, and adversely affect our revenues and operating income.

 

Food safety regulations regarding the raw ingredients for our products may restrict, inhibit or delay our ability to sell our products.

 

Before 2018, the China Food and Drug Administration, or the CFDA, had the regulatory authority to oversee, administer and enforce all laws, regulations and rules concerning the food industry business operations in China. After the institutions reformed, the CFDA has been abolished, and relevant regulatory authority has been taken over by the State Administration for Market Regulation, or the SAMR, under the State Council.

 

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The food industry is subject to extensive regulations in China. The PRC laws and regulations governing the food industry primarily consist of the PRC Food Safety Law (2009), as last amended in 2018; the Implementation Regulation for the Food Safety Law of PRRC (2009), or the Food Safety Regulation, as amended in 2019; the Administrative Measures for Food Production Licensing (2010), or the Food Production Licensing Rule, as amended in 2020; and the Administrative Measures for Food Business Licensing (2015), or the Food Business Licensing Rule, as amended in 2017. Under the PRC Food Safety Law and the Food Safety Regulation, food product manufacturers and business operators shall obtain the required food production permits; food producers and business operators are subject to regular quality inspection and supervision by the local governmental agencies and their product permits may be revoked if they no longer meet the standards and requirements for food production and operation; food-producing enterprises shall establish and implement food safety management systems, such as ingredient inspection and acceptance, production process safety management, storage management, equipment management, and substandard product management systems; and packaging of pre-packed food shall bear a label which states manufacturing permit serial number; among other things. The State Council implements a licensing system for food product manufacture and distribution. According to the Food Production Licensing Rule, a food production license must be obtained prior to engaging in food production activities in the PRC. The Food Business Licensing Rule requires food business operators to obtain a food business license for each business entity engaging in food business operations. We have obtained the required Food Production Licenses and Food Business Licenses for related products. In order for our business to continue, we must continue to comply with all government inspection and licensing requirements. If we were to have an unsatisfactory inspection, or otherwise fail to comply with government safety regulations in all respects, our ability to continue operations and to continue to sell our products may be inhibited or delayed. Additionally, the term of Food Production Licenses and Food Business Licenses is 5 years. We have been closely monitoring the status of all the permits and have applied for renewal before the relevant licenses expired. The failure to renew the relevant licenses and/or registrations may subject us to fines or sanctions which will have negative impact on our production.

 

We may not be able to protect our intellectual property rights.

 

We rely on a combination of trademark, fair trade practice, patent, copyright and trade secret protection laws in China. Intellectual property protection may not be sufficient in China. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our patent rights in China. In addition, policing any unauthorized use of our intellectual property is difficult, time-consuming and costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value.

 

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

 

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in the prospectus based on foreign laws.

 

We are a company incorporated under the laws of the Cayman Islands, we conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and most are PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside China. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

 

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Shareholder claims that are common in the United States, including securities law class actions and fraud claims, generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. According to Article 177 of the PRC Securities Law which was amended in December 2019, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities to overseas parties, leaving no mechanism to obtain information or conduct an investigation, if necessary

 

We may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us could have a material and adverse effect on our ability to conduct our business.

 

We are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from our PRC subsidiary for our cash requirements, including for services of any debt we may incur. The ability of our PRC subsidiary to pay dividends and other distributions on equity, in turn, depends on the payment they receive from our variable interest entity as service fees pursuant to certain contractual arrangements among our PRC subsidiary, our variable interest entity and its shareholders entered into to comply with certain restrictions under PRC laws on foreign investment.

 

Additionally, our subsidiary’s ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC subsidiary to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary, our variable interest entity and its subsidiaries are required to set aside at least 10% of their after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of their registered capital. These reserves are not distributable as cash dividends. A company may discontinue the contribution when the aggregate sum of the statutory surplus reserve is more than 50% of its registered capital. The statutory common reserve fund of a company shall be used to cover the losses of the company, expand the business and production of the company or be converted into additional capital. Subject to above-referenced limitations and at the discretion of board of directors, the accumulated profits after appropriation of statutory surplus reserve available for dividends were approximately $5,072,672 as of September 30, 2020 and $2,368,512 as of September 30, 2019. If our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC subsidiary to distribute dividends or other payments to its shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business. As of September 30, 2020, the statutory surplus reserves of our PRC subsidiary, our variable interest entity, and its subsidiaries, as percentage of their respective registered capitals, ranged from 5% to 32% and averaged 14% in the aggregate.

 

To address the persistent capital outflow and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures in the subsequent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or the SAFE Circular 3, issued on January 26, 2017, provides that the banks shall, when dealing with dividend remittance transactions from domestic enterprise to its offshore shareholders of more than US$50,000, review the relevant board resolutions, original tax filing form and audited financial statements of such domestic enterprise based on the principal of genuine transaction. The PRC government may continue to strengthen its capital controls and our PRC subsidiary’s dividends and other distributions may be subject to tightened scrutiny in the future. Any limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

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In addition, the PRC Enterprise Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless reduced under treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises are tax resident. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Under the Circular of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, promulgated by the State Administration of Taxation, or the SAT, on February 20, 2009, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. Nonresident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, nonresident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, our Hong Kong subsidiary may be able to benefit from the 5% withholding tax rate for the dividends it receives from our PRC subsidiary, if it satisfies the conditions prescribed under the SAT Circular 81, and other relevant tax rules and regulations. However, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Accordingly, there is no assurance that the reduced 5% will apply to dividends received by our Hong Kong subsidiary from our PRC subsidiary. This withholding tax will reduce the amount of dividends we may receive from our PRC subsidiary.

 

The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.

 

Under the PRC laws, legal documents for corporate transactions, including agreements and contracts, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with relevant PRC market regulation authorities.

 

In order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops and seals. In any event that the chops and seals are intended to be used, the responsible person will submit the application which will then be verified and approved by authorized employees in accordance with our internal control procedures and rules. In addition, in order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries or our VIE. If any employee obtains, misuses or misappropriates our chops and seals or other controlling non-tangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations.

 

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

 

We are an offshore holding company conducting our operations in China through our PRC subsidiary and VIE. We may make loans to our PRC subsidiary and VIE subject to the approval from governmental authorities and limitation of amount, or we may make additional capital contributions to our PRC subsidiary in China.

 

Any loans to our PRC subsidiary in China, which is treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiary in China to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the SAFE. In addition, a foreign-invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign-invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).

 

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SAFE promulgated the Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Circular of the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice. SAFE promulgated the Circular of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in China.

 

On October 23, 2019, SAFE issued the Circular of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment, or SAFE Circular 28, which took effect on the same day. SAFE Circular 28, subject to certain conditions, allows foreign-invested enterprises whose business scope does not include investment, or the non-investment foreign-invested enterprises, to use their capital funds to make equity investments in China. Since SAFE Circular 28 was issued only recently, its interpretation and implementation in practice are still subject to substantial uncertainties.

 

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiary or our variable interest entity or future capital contributions by us to our PRC subsidiary in China. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiary or our variable interest entity when needed. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

 

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Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

 

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

 

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiary in China may be used to pay dividends to our company. However, approval from or registration with appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiary and variable interest entity to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our Shares.

 

Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.

 

Among other things, the Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, promulgated by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. The M&A Rules require, among other things, that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that have or may have an impact on the national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the NPC which became effective in 2008 requires that transactions that are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the MOFCOM before they can be completed. In addition, PRC national security review rules which became effective in September 2011 require acquisitions by foreign investors of PRC companies engaged in military-related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us, or may otherwise adversely affect us.

 

In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, to replace the Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.

 

Under SAFE Circular 37, PRC residents who control, or have prior to the implementation of SAFE Circular 37 controlled, directly or indirectly of offshore special purpose vehicles, or SPVs, will be required to register such investments with the SAFE or its local branches. The term “control” under SAFE Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by PRC residents in the SPVs, by means of acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. In addition, any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contribution into its subsidiary in China. On February 13, 2015, the SAFE promulgated a Circular on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015. Under SAFE Circular 13, applications for foreign exchange registration of inbound foreign direct investment and outbound overseas direct investment, including those required under the SAFE Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of the SAFE.

 

These regulations may have a significant impact on our present and future structuring and investment. We have requested or intend to take all necessary measures to require our shareholders who to our knowledge are PRC residents to make the necessary applications, filings and amendments as required under these regulations. We further intend to structure and execute our future offshore acquisitions in a manner consistent with these regulations and any other relevant legislation. However, because it is presently uncertain how the SAFE regulations and any future legislation concerning offshore or cross-border transactions will be interpreted and implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, we cannot provide any assurances that we will be able to comply with, qualify under, or obtain any approvals required by the regulations or other legislation. Furthermore, we cannot assure you that any PRC shareholders of our company or any PRC company into which we invest will be able to comply with those requirements. Any failure or inability by such individuals or entities to comply with SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC subsidiary’s ability to distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

 

Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation have been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant governmental authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

 

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Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans of overseas, publicly listed company may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies before they obtain the incentive shares or exercise the share options. In the meantime, our directors, executive officers and other employees who are PRC citizens or who are non-PRC citizens residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who have been granted incentive share awards by us, may follow the Circular of the State Administration of Foreign Exchange on Issues Relating to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company, or the SAFE Circular 7, promulgated by the SAFE in 2012. Pursuant to the SAFE Circular 7, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or non-PRC citizen residing in the PRC for a continuous period of not less than one year and who have been granted options will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines of up to RMB300,000 for entities and up to RMB50,000 for individuals, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us.

 

The SAT has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.

 

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the SAT issued the Circular of the State Administration of Taxation on Issues Concerning the Identification of Chinese-controlled Overseas Registered Enterprises as Resident Enterprises in accordance with the Actual Standards of Organizational Management, or the SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the places where the senior management and senior management departments responsible for the daily production, operation and management of the enterprise perform their duties are mainly located within the territory of the PRC; (ii) decisions relating to the enterprise’s financial matters (such as money borrowing, lending, financing and financial risk management) and human resource matters (such as appointment, dismissal and salary and wages) are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC. In addition, the SAT issued the Bulletin of the State Administration of Taxation on Printing and Distributing the Administrative Measures for Income Tax on Chinese-controlled Resident Enterprises Incorporated Overseas (Trial Implementation) in 2011, providing more guidance on the implementation of SAT Circular 82. This bulletin clarifies matters including resident status determination, post determination administration, and competent tax authorities. In January 2014, the SAT issued the Bulletin of the State Administration of Taxation on Issues concerning the Determination of Resident Enterprises Based on the Standards of Actual Management Institutions, or SAT Bulletin 9. According to SAT Bulletin 9, a Chinese-controlled offshore incorporated enterprise that satisfies the conditions prescribed under the SAT Circular 82 for being recognized as a PRC tax resident must apply for being recognized as a PRC tax resident to the competent tax authority at the place of registration of its main investor within the territory of China.

 

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We believe that Bon Natural Life Limited is not a PRC resident enterprise for PRC tax purposes. See “Regulation—Regulations Relating to Tax—Enterprise Income Tax.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that Bon Natural Life Limited or any of our offshore subsidiaries is a PRC resident enterprise for enterprise income tax purposes, we and our offshore subsidiary will be subject to PRC enterprise income on their worldwide income at the rate of 25%, which would materially reduce our net income. Furthermore, if we are treated as a PRC tax resident enterprise, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident enterprise shareholders may be subject to PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders and any gain realized on the transfer of ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% unless a reduced rate is available under an applicable tax treaty. It is unclear whether non-PRC shareholders of Bon Natural Life Limited would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that Bon Natural Life Limited is treated as a PRC resident enterprise.

 

We may incur liability for unpaid taxes, including interest and penalties.

 

In the normal course of business, our Company may be subject to challenges from various PRC taxing authorities regarding the amounts of taxes due. PRC taxing authorities may take the position that the Company owes more taxes than it has paid. The Company recorded tax liabilities of $4.4 million as of September 30, 2020, primarily including $0.85 million income tax payable and approximately $3.5 million in unpaid value added taxes (“VAT” tax) because certain VAT tax invoices, such as those on the Company’s construction-in-progress project have not been received and included in the Company’s VAT tax return filing as of September 30, 2020. For the year ended September 30, 2020, based on statutory penalty rate, we accrued and recorded penalty of $247,823 associated with unpaid VAT tax liabilities and penalty of $24,942 associated with unpaid income tax liabilities, which have been reflected in the consolidated statements of income and comprehensive income. For the $0.85 million income tax payable as of September 30, 2020, we expect to settle the liabilities in May 2021 when the 2020 annual income tax return is to be filed with local tax authority. For the unpaid VAT tax liabilities, we have discussed with local tax authorities and expect to settle the tax liabilities before September 30, 2021. It is possible that the tax liability of the Company for past taxes may be higher than those amounts, if the PRC authorities determine that we are subject to interest and penalties or that we have not paid the correct amount. To the extent our Company is unable to settle its tax liabilities as scheduled, or interest and penalties on unpaid tax liabilities assessed by tax authorities greatly exceed management’s estimates, our financial condition and operating results may be negatively impacted.

 

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

 

On February 3, 2015, the SAT issued a Bulletin of State Administration of Taxation on Several Issues concerning the Enterprise Income Tax on the Indirect Transfer of Properties by Non-resident Enterprises, or SAT Bulletin 7, which came into effect on February 3, 2015, but will also apply to cases where their PRC tax treatments are not yet concluded. Pursuant to SAT Bulletin 7, an ‘‘Indirect Transfer’’ of PRC assets, including a transfer of equity interests in an unlisted non-PRC holding company of a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of the underlying PRC assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.

 

On October 17, 2017, the SAT issued the Bulletin of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.

 

Where a non-resident enterprise transfers taxable assets in China indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise as either transferor or transferee, or the PRC entity whose equity is transferred, may report such Indirect Transfer to the relevant tax authority. Under the “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and we may be subject to withholding obligations if our company is a transferee in such transactions, under SAT Bulletin 7 and SAT Bulletin 37. For transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiary may be requested to assist in the filing under SAT Bulletin 7 and SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

If our preferential tax treatments and government subsidies are revoked or become unavailable or if the calculation of our tax liability is successfully challenged by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions.

 

The Chinese government has provided tax incentives to our variable interest entity in China, including reduced enterprise income tax rates. For example, under the PRC Enterprise Income Tax Law and its implementation rules, the statutory enterprise income tax rate is 25%. However, the income tax of an enterprise that has been determined to be a high and new technology enterprise can be reduced to a preferential rate of 15%. According to the Administrative Measures for the Accreditation of High-tech Enterprises promulgated by three PRC regulatory agencies, including SAT, the qualification of high and new enterprise is effective for a renewable three-year permitted. If our variable interest entity fails to renew the qualification of high and new enterprise, our variable interest entity will be subject to the statutory enterprise income tax rate of 25%. In addition, our variable interest entity enjoys local government subsidies. Any increase in the enterprise income tax rate applicable to our PRC subsidiary or our variable interest entity in China, or any discontinuation, retroactive or future reduction or refund of any of the preferential tax treatments and local government subsidies currently enjoyed by our variable interest entity in China, could adversely affect our business, financial condition, and results of operations.

 

Further, in the ordinary course of our business, we are subject to complex income tax and other tax regulations, and significant judgment is required in the determination of a provision for income taxes. Although we believe our tax provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest, and penalties in excess of our tax provisions, our financial condition and results of operations would be materially and adversely affected.

 

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Our failure to fully comply with PRC labor-related laws may expose us to potential penalties.

 

Companies operating in China are required to participate in mandatory employee social security schemes that are organized by municipal and provincial governments, including pension insurance, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing provident funds. Such schemes have not been implemented consistently by the local governments in China given the different levels of economic development in different locations, but generally require us to make contributions to employee social security plans at specified percentages of the salaries, bonuses and certain allowances of our eligible full-time employees, up to a maximum amount specified by the local government from time to time. We have accrued in financial statements but not made full contributions to the social insurance and housing provident funds in accordance for our eligible full-time employees as required by the relevant PRC laws and regulations. As the date of this prospectus, none of our variable interest entity and its subsidiaries had received any notice from local authorities or any claim or request from the employees in this regard. Our failure to make full contributions to social insurance and to comply with applicable PRC labor-related laws regarding housing funds may subject us to late payment penalties and other fines or labor disputes, and we could be required to make up the contributions for these plans, which may adversely affect our financial condition and results of operations.

 

According to applicable PRC laws and regulations, employers must open social insurance registration accounts and housing provident fund accounts and pay social insurance and housing provident funds for employees. Our PRC subsidiary or some subsidiaries of our variable interest entity have not opened social insurance registration accounts or housing provident fund accounts. We may be subject to penalties imposed by the local social insurance authorities and the local housing provident fund management centers for failing to discharge our obligations in relation to payment of social insurance and housing provident funds as an employer.

 

Our failure to fully comply with PRC construction-related laws may expose us to potential penalties.

 

Our VIE has rented a factory in Weinan, Shaanxi for use as our Weinan Raw Materials and Ingredients Production Site (See “History and Organizational Structure—Property, Plants, and Equipment — Weinan Raw Materials and Ingredients Production Site”). The landlord constructed some buildings of this production site without obtaining the planning permits, construction permits, or going through the completion filing, fire safety filing, or environmental protection procedures in accordance with the PRC laws and regulations. Such failure to comply with the relevant laws and regulations may subject us to administrative penalties, including but not limited to paying fines, being required to stop using or demolishing such buildings. As the date of this prospectus, our VIE and its subsidiary have not received any notice or any claim from the local authorities with respect to such buildings. We will urge the landlord to apply for relevant permits and handle relevant procedures or filings with the local authorities.

 

Such buildings are mostly used as the warehouses. If the local authorities require us to stop using such buildings, we will need to rent new warehouses, which may affect our normal operations and cause operating losses. But we believe that the amount of the loss will not exceed 3% of the Company’s sale revenues. In addition, the lease term of this production site will expire on September 30, 2022. At that time, we may not renew the lease of this production site and may transfer the production to a new production base.

 

Risks Related to Our Shares and This Offering

 

An active trading market for our ordinary shares may not develop and the trading price for our Shares may fluctuate significantly.

 

We have been approved to list our Shares on the Nasdaq Capital Market. We have no current intention to seek a listing for our ordinary shares on any other stock exchange. Prior to the completion of this offering, there has been no public market for our ordinary shares, and we cannot assure you that a liquid public market for our Shares will develop. If an active public market for our Shares does not develop following the completion of this offering, the market price and liquidity of our Shares may be materially and adversely affected. The initial public offering price for our Shares was determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our Shares after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their Shares.

 

The trading price of our Shares is likely to be volatile, which could result in substantial losses to investors.

 

The trading price of our Shares is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for our Shares may be highly volatile for factors specific to our own operations, including the following:

 

  variations in our revenues, earnings and cash flow;
     
  announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;
     
  announcements of new offerings, solutions and expansions by us or our competitors;

 

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  changes in financial estimates by securities analysts;
     
  detrimental adverse publicity about us, our services or our industry;
     
  additions or departures of key personnel;
     
  release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and
     
  potential litigation or regulatory investigations.

 

Any of these factors may result in large and sudden changes in the volume and price at which our Shares will trade.

 

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

Certain existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.

 

Upon the completion of this offering, our directors and officers will collectively own an aggregate of 54.15% of the total voting power of our outstanding ordinary shares immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option. As a result, they have substantial influence over our business, including significant corporate actions such as mergers, consolidations, sales of all or substantially all of our assets, election of directors and other significant corporate actions.

 

They may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the Shares. These actions may be taken even if they are opposed by our other shareholders, including those who purchase Shares in this offering. In addition, the significant concentration of share ownership may adversely affect the trading price of the Shares due to investors’ perception that conflicts of interest may exist or arise. For more information regarding our principal shareholders and their affiliated entities, see “Principal Shareholders.”

 

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our Shares, the market price for our Shares and trading volume could decline.

 

The trading market for our Shares will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our Shares, the market price for our Shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our Shares to decline.

 

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The sale or availability for sale of substantial amounts of our Shares could adversely affect their market price.

 

Sales of substantial amounts of our Shares in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our Shares and could materially impair our ability to raise capital through equity offerings in the future. The Shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 7,800,000 Shares outstanding immediately after this offering, or 8,100,000 Shares if the underwriters exercise their over-allotment option in full. In connection with this offering, we, our directors and officers and our existing shareholders have agreed not to sell any ordinary shares for 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our Shares. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

 

Negative publicity may harm our brand and reputation and have a material adverse effect on our business.

 

Negative publicity about us, including our services, management, business model and practices, compliance with applicable rules, regulations and policies, or our network partners may materially and adversely harm our brand and reputation and have a material adverse effect on our business. We cannot assure you that we will be able to defuse any such negative publicity within a reasonable period of time, or at all. Additionally, allegations, directly or indirectly against us, may be posted on the internet by anyone on a named or anonymous basis, and can be quickly and widely disseminated. Information posted may be inaccurate, misleading and adverse to us, and it may harm our reputation, business or prospects. The harm may be immediate without affording us an opportunity for redress or correction. Our reputation may be negatively affected as a result of the public dissemination of negative and potentially inaccurate or misleading information about our business and operations, which in turn may materially adversely affect our relationships with our customers, employees or business partners, and adversely affect the price of our Shares.

 

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our Shares for return on your investment.

 

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our Shares as a source for any future dividend income.

 

Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our Shares will likely depend entirely upon any future price appreciation of our Shares. There is no guarantee that our Shares will appreciate in value after this offering or even maintain the price at which you purchased the Shares. You may not realize a return on your investment in our Shares and you may even lose your entire investment in our Shares.

 

Our management will have significant discretion over our use of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.

 

Our management’s intended used of the net proceeds of this offering is as set forth below under “Use of Proceeds.” The Use of Proceeds disclosed in this prospectus describes the broad categories of management’s planned use of funds and does not represent a detailed budget or a legally binding commitment to any specific expenditure. Our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of operations or increase our Share price.

 

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The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC laws.

 

The M&A Rules, which were adopted in 2006 by six PRC regulatory agencies, including the China Securities Regulatory Commission, or the CSRC, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and this offering may ultimately require approval from the CSRC. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

 

Our PRC legal counsel, Chamzon Law Firm, has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of the listing and trading of our Shares on the Nasdaq Capital Market because (i) our wholly foreign-owned PRC subsidiary was established by foreign direct investment, rather than through a merger or acquisition of equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are the beneficial owners of the Company, and (ii) no provision in the M&A Rules clearly classifies contractual arrangements as a type of transaction subject to the M&A Rules.

 

However, as a principle under PRC Securities Law, most recently amended in 2019 by the Standing Committee of the NPC, any direct or indirect issuance of securities abroad by domestic companies, or any listing and trading of securities abroad by such companies, is subject to approval by CSRC. Our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering, and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC counsel, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the Shares. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the Shares offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirements could have a material adverse effect on the trading price of the Shares.

 

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

 

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2020 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

 

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Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. To the extent we choose to follow home country practice with respect to corporate governance matters, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

 

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

 

Certain judgments obtained against us by our shareholders may not be enforceable.

 

We are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, all of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

 

Because our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

 

If you purchase Shares in this offering, you will pay more for your Shares than the amount paid by our existing shareholders for their ordinary shares on a per Share basis. As a result, you will experience immediate and substantial dilution of approximately US$2.61 per Share, representing the difference between the initial public offering price of US$5.00 per Share, and our pro forma as adjusted net tangible book value per Share as of September 30, 2020, immediately upon the completion of this offering, and the net proceeds to us from this offering.

 

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

 

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

 

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We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the Nasdaq Stock Exchange. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.

 

As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain Nasdaq Stock Exchange corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our shares.

 

We are exempted from certain corporate governance requirements of the Nasdaq Stock Exchange by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic U.S. companies listed on the Nasdaq Stock Exchange. The standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance, we are not required to:

 

  have a majority of the board be independent (although all of the members of the audit committee must be independent under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act);
     
  have a compensation committee or a nominating or corporate governance committee consisting entirely of independent directors;
     
  have regularly scheduled executive sessions with only independent directors; or
     
  have executive sessions of solely independent directors each year.

 

We have relied on and intend to continue to rely on some of these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements of the Nasdaq Stock Exchange.

 

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our Shares that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter.

 

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

 

We are a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Stock Exchange, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

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We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

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

 

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal controls over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements for the years ended September 30, 2020 and 2019, we identified several material weaknesses in our internal control over financial reporting and other control deficiencies as of September 30, 2020. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

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

 

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

 

As of the date of this prospectus, we have not fully addressed the above-referenced weaknesses. However, we have made progress in implementing remedial measures, specifically:

 

We have hired two additional mid-level financial staff in late 2020, one of whom has been staffed in financial reporting unit and the other in internal control department. In addition, we have identified three potential candidates with U.S. Certified Public Accountant qualifications and related experience and skills for senior financial roles. We expect to hire at least one candidate prior to June 2021. In the interim, we will continue using an external consultant to assist us in financial reporting.

 

Since September 30, 2020, the management team, including our chief executive officer, Mr. Yongwei Hu, our chief financial officer, Mr. Zhenchao Li, and other management team members of our VIE and its subsidiaries in the PRC have held internal meetings, discussions, trainings, and seminars on a monthly basis to review our financial statements and operational performance and to identify areas to improve our internal control procedures.

 

We have appointed independent directors and established an audit committee, effective upon effectiveness of the registration statement of which this prospectus forms a part;
   
In April 2021, we engaged Grant Thornton (Special General Partnership), Xiamen Branch to assist us in setting-up our financial and system control framework. We expect to fully complete the setup of our financial and system control framework by December 31, 2021.

 

We plan to fully implement the above-referenced measures prior to December 31, 2021.

 

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

 

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There can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares.

 

A non-U.S. corporation will be a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross income for such year consists of certain types of “passive” income; or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income (the “asset test”). Based on our current and expected income and assets (taking into account the expected cash proceeds and our anticipated market capitalization following this offering), we do not presently expect to be a PFIC for the current taxable year or the foreseeable future. However, no assurance can be given in this regard because the determination of whether we are or will become a PFIC is a fact-intensive inquiry made on an annual basis that depends, in part, upon the composition of our income and assets. Fluctuations in the market price of our Shares may cause us to become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose of the asset test may be determined by reference to the market price of our Shares. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering.

 

If we were to be or become a PFIC for any taxable year during which a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) holds our ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

 

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Cautionary Note Regarding Forward-Looking Statements AND INDUSTRY DATA

 

This prospectus contains forward-looking statements that involve risks and uncertainties. We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. The actual results could differ materially from our forward-looking statements. Our actual results are most likely to differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in this Risk Factors section and elsewhere in this prospectus. This prospectus also contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The Chinese nutritional and dietary supplements market may not grow at the rate projected by market data, or at all. Failure of this market to grow at the projected rate may have a material and adverse effect on our business and the market price of our Shares. In addition, the rapidly changing nature of the nutritional and dietary supplements industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

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Use of Proceeds

 

The net proceeds to us from the sale of 2,000,000 ordinary shares (or 2,300,000 ordinary shares if the over-allotment option is exercised in full) offered at a public offering price of $5.00 per share will vary depending upon the total number of shares sold. The following table summarizes, in order of priority the anticipated application of the proceeds we will receive from this Offering:

 

    Amount     Percent  
GROSS OFFERING   $ 10,000,000       100 %
Commission and Expense Allowance   $ 900,000       9.0 %
Estimated Offering expenses   $ 832,883       8.33 %
Net Proceeds   $ 8,267,117       82.77 %
USE OF NET PROCEEDS                
Expansion of Production Capacity1   $ 2,600,000       31.44 %
Sales and Distribution Network Expansion2   $ 1,500,000       18.11 %
Research and Development3   $ 1,600,000       19.44 %
Working Capital4   $ 2,567,117       31.11 %
TOTAL APPLICATION OF NET PROCEEDS   $ 8,267,117       100.00 %

 

1 We intend to use approximately $2,600,000, or 31.44% of the net offering proceeds, to increase production capacity by expanding our physical plants.

 

2 We intend to use approximately $1,500,000, or 18.11% of the net offering proceeds, to expand our sales and distribution network.

 

3 We intend to use approximately $1,600,00, or 19.44% of the net offering proceeds, to invest in continued research and development.

 

4 We intend to use approximately $2,567,117, or 31.11% of the net offering proceeds, for working capital purposes.

 

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our PRC subsidiaries only through loans or capital contributions and to our variable interest entity only through loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiaries or make additional capital contributions to our PRC subsidiaries to fund their capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China— PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

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Capitalization

 

The following table sets forth our capitalization as of September 30, 2020 presented on:

 

  An actual basis; and
     
  a pro forma as adjusted basis to give effect to the issuance and sale of the 2,000,000 Shares by us in this offering at an assumed initial public offering price of US$5.00 per share, after deducting the estimated underwriting commissions and estimated offering expenses.

 

The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering is subject to adjustment based on the initial public offering price of our ordinary shares. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    September 30, 2020  
    Actual     As adjusted (Over-allotment option not exercised) (2)     As adjusted (Over-allotment option exercised in full) (3)  
      (Presented in US$)  
                         
Long-term debt     2,482,251       2,482,251       2,482,251  
Ordinary shares, 5,800,000 shares issued and outstanding as of September 30, 2020(1) ;7,800,000 Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is not exercised, and 8,100,000 Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is exercised in full     580       780       810  
Additional paid-in capital     5,251,205       13,518,122       14,883,092  
Statutory reserve     579,922       579,922       579,922  
Retained earnings     5,072,672       5,072,672       5,072,672  
Accumulated other comprehensive loss     (388,102 )     (388,102 )     (388,102 )
Total Bon Natural Life Limited shareholders’ equity     10,516,277       18,783,394       20,148,394  
Total capitalization     12,998,528       21,265,645       22,630,645  

 

  (1) Retrospectively restated for effect of a 1 for 3 reverse stock split on June 24, 2020.
  (2) Reflects the sale of ordinary shares in this offering at an assumed initial public offering price of $5.00 per share, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us, assuming the Underwriters’ over-allotment option has not been exercised. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. Additional paid-in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts and estimated offering expenses payable by us. We estimate that such net proceeds will be approximately $8,267,117 assuming the Underwriters have not exercised the over-allotment option. The pro forma as adjusted total equity of $18,783,394 is the sum of the net proceeds of $8,267,117  and the actual equity of $10,516,277.
  (3) If the Underwriter exercises the over-allotment option, we estimate that such net proceeds will be approximately $9,632,117. The pro forma as adjusted total equity of $20,148,394 is the sum of the net proceeds of $9,632,117 and the actual equity of $10,516,277.

 

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Dilution

 

Purchasers of our securities in this offering will experience immediate and substantial dilution in the net tangible book value of their ordinary shares from the initial public offering price.

 

The historical net tangible book value as of September 30, 2020 was $10,375,284 (as calculated by subtracting intangible assets of $140,993 from the actual equity of $10,516,277) or approximately $1.79 per share. Historical net tangible book value per share of ordinary shares is equal to our total tangible assets less total liabilities, divided by the number of shares of ordinary shares outstanding as of September 30, 2020. Adjusted to give effect to the receipt of net proceeds, after deducting the estimated underwriting discounts and offering expenses payable by us, from the sale of 2,000,000 ordinary shares for $10,000,000, net tangible book value will be approximately $2.39 per share. This will represent an immediate increase of approximately $0.60 per share to existing stockholders and an immediate and substantial dilution of approximately $2.61 per share to new investors purchasing our securities in this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our ordinary shares in this offering and the pro forma net tangible book value per share of our ordinary shares immediately following this offering.

 

The following table illustrates such dilution:

 

    Post-Offering(1)     Full Exercise of
Over-Allotment
Option
 
Assumed Initial public offering price per Ordinary Share   $            5.00     $           5.00  
Net tangible book value per Ordinary Share as of September 30, 2020   $ 1.79     $ 1.79  
As adjusted net tangible book value per Ordinary Share attributable to payments by new investors   $ 0.60     $ 0.68  
Pro forma net tangible book value per Ordinary Share immediately after this offering   $ 2.39     $ 2.47  
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering   $ 2.61     $ 2.53  

 

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

 

If the underwriter exercises its over-allotment option in full, the pro forma as adjusted net tangible book value per Ordinary Share after the offering would be $2.47, the increase in net tangible book value per Ordinary Share to existing shareholders would be $0.68, and the immediate dilution in net tangible book value per Ordinary Share to new investors in this offering would be $2.53.

 

The following table sets forth as of September 30, 2020 the number of shares of ordinary shares purchased from us and the total consideration paid by our existing stockholders and by new investors in this offering if new investors purchase the maximum offering, assuming a purchase price in this offering of $5.00 per share of ordinary shares.

 

    Number     Percent     Amount  
Existing Stockholders     5,800,000       74.4 %   $ 5,251,785  
New Investors     2,000,000       25.6 %   $ 10,000,000  
Total     7,800,000       100.0 %   $ 15,251,785  

 

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Enforceability of Civil Liabilities

 

We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

 

  political and economic stability;
     
  an effective judicial system;
     
  a favorable tax system;
     
  the absence of exchange control or currency restrictions; and
     
  the availability of professional and support services.

 

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:

 

  the Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors; and
     
  Cayman Islands companies may not have standing to sue before the federal courts of the United States.

 

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

 

Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and most of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

We have appointed The Crone Law Group P.C., located at 500 Fifth Ave, Suite 938, New York, NY 10110 as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

 

We have been informed that it is uncertain whether the courts of the Cayman Islands will allow shareholders of our company to originate actions in the Cayman Islands based upon securities laws of the United States. In addition, there is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman Islands. We have been further advised us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment:

 

(a) is given by a foreign court of competent jurisdiction;

 

(b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;

 

(c) is final;

 

(d) is not in respect of taxes, a fine or a penalty; and

 

(e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

 

Chamzon Law Firm, our counsel as to PRC laws, has advised us that there is uncertainty as to whether the courts of China would:

 

  recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or
     
  entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

 

Chamzon Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. The PRC does not have any treaties or other forms of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC laws against a company in the PRC for disputes relating to contracts or other property interests, the PRC court may accept a course of action based on the laws or the parties’ express mutual agreement in contracts choosing PRC courts for dispute resolution if (a) the contract is signed and/or performed within the PRC, (b) the subject of the action is located within the PRC, (c) the company (as defendant) has seizable properties within the PRC, (d) the company has a representative organization within the PRC, or (e) other circumstances prescribed under the PRC laws. The action may be initiated by a shareholder through filing a complaint with the PRC court. The PRC court will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in an action unless the home jurisdiction of such foreign citizens or companies restricts the rights of PRC citizens and companies.

 

In addition, it will be difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding our ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

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

 

Key Financial Performance Indicators

 

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

 

Net Revenue

 

Our net revenue is driven by changes in the number of customers, sales volume, selling price, and mix of products sold. Our products are sold with no right of return and we do not provide other credits or sales incentive to customers.

 

We sell our products to our customers in three broad product categories: fragrance compounds, health supplemental powder drinks and bioactive food ingredients, which accounted for 43.3%, 21.3% and 35.4% of our total revenue for the year ended September 30, 2020, and accounted for 41.1%, 26.5% and 32.4% of our total revenue for the year ended September 30, 2019, respectively. Sales volumes of our fragrance compounds and bioactive food ingredients increased by 6.5% and 116.0% in fiscal 2020 as compared to fiscal 2019 due to strong customer demand and increased average customer order size for these products. However, sales volume of our health supplement (powder drinks) decreased by 13.9% because we had difficulty to fulfil customer orders and timely deliver our products to customers during the period from February to April 2020 due to logistic disruptions caused by the COVID-19. Average selling prices of our fragrance compounds and health supplements (powder drinks) increased by 11.9% and 5.9% in fiscal 2020 as compared to fiscal 2019 as a result of our adjusted pricing strategy in response to increased raw material purchase costs. However, average selling price of our bioactive food ingredients decreased by 42.7%, because through research and development, the extraction process for our Stachyose products has been improved during 2020, which led to our effective extraction of the ingredient out of raw materials from original 60% extraction ratio to current 95% extraction ratio, and accordingly helped us save the manufacturing cost, lower down our average unit cost and be more competitive. As a result, we lowered our selling price of Stachyose products to stimulate customer orders while benefiting our community and making the product more affordable to our customers during the COVID-19 outbreak. The total number of customers were 114 and 132 customers in fiscal year 2020 and 2019, respectively. The number of our domestic customers decreased by 10 and the number of our oversea customers decreased by 8 in fiscal 2020, due to travel restriction and logistic constraint caused by COVID-19 pandemic. However, as we put more marketing effort to promote our sales to large domestic enterprise clients, average customer order size increased by 28.7% in 2020 as compared to 2019, despite the decrease in total number of customers. As a result of these change in product mix, change in sales volume, changes in average selling price and changes in average customer order size, our total revenue increased by 11.1% in fiscal 2020 as compared to fiscal 2019.

 

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Gross Profit

 

Gross profit is equal to net revenue minus cost of goods sold. Cost of goods sold primarily includes inventory costs (raw materials, labor, packaging cost, depreciation and amortization, third-party products purchase price, freight costs and overhead). Cost of goods sold generally changes as our production costs change, as these are affected by factors including the market price of raw materials, labor productivity, and in changes to the customer and product mix. Our cost of revenues accounted for 71.4% and 67.8% of our total revenue for the fiscal year 2020 and 2019, respectively. Our gross margin was 28.6% for fiscal year 2020, a decrease by 3.6% from gross margin of 32.2% in fiscal year 2019. The increase in cost of revenue and decrease in gross margins were primarily attributable to increased raw material purchase costs associated with our fragrance compounds and health supplements (powder drinks) products. In addition, our gross profit and gross margin are also affected by the gross margin of each product category and the different product mix of sales during each reporting period. Our gross margin increases when more products with lower costs and higher margin are sold, while our gross margin decreases when more products with higher costs and lower margin are sold. In fiscal year 2020, more products with higher costs and lower margin were sold. These factors led to the decrease in our gross profit and gross margin. See detailed discussion under “–Results of Operation”.

 

Operating Expenses

 

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

 

Our selling expenses primarily include salary and welfare benefit expenses paid to our sales personnel, advertising expenses to increase the awareness of our brand, shipping ad delivery expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses. Our selling expenses accounted for 0.9% and 1.7% of our total revenue for the years ended September 30, 2020 and 2019, respectively. The COVID-19 outbreak and spread caused reduced trade shows and business travel, and we put more focus to target our customers through online and virtual marketing and sales promotion. In addition, the disruption of logistics caused by COVID-19 also led to our reduced shipping and delivery expense associated with export sales to overseas customers. Although our selling expense decreased in 2020, from a long-term perspective, if we continue to expand our sales network, we still expect that our overall selling expenses, including but not limited to, advertising expenses, brand promotion expenses and salaries increase in the future if our business further grows.

 

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation, bad debt reserve expenses, inspection and maintenance expenses, office supply and utility expenses, business travel and meals expenses, land and property taxes and professional service expenses. General and administrative expenses were 7.5% and 8.0% of our revenues for the years ended September 30, 2020 and 2019, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, to continue to increase in the foreseeable future, as we plan to hire additional personnel and incur additional expenses in connection with the expansion of our business operations. We expect our professional fees for legal, audit, and advisory services to increase as we become a public company upon the completion of this offering.

 

Our research and development expenses primarily consist of salaries, welfare and insurance expenses paid to our employees involved in the research and development activities, materials and supplies used in the development and testing of our new products, depreciation, and other miscellaneous expenses. Research and development expenses were 1.1% and 3.2% of our revenues for the years ended September 30, 2020 and 2019, respectively. Although in 2020, our R&D expense decreased due to our reduced outsourcing the R&D activities to external consulting firms, reduced materials consumption and decreased number of employees involved in R&D activities as affected by the COVID-19, from a long-term perspective, we still expect our research and development expenses to continue to increase in the foreseeable future as we continue to develop new products and diversify our product offerings to satisfy customer demand. 

 

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Results of Operations for the Years Ended September 30, 2020 and 2019

 

Comparison of Results of Operations for the Years Ended September 30, 2020 and 2019

 

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

 

   For the Years Ended September 30, 
   2020   2019   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
REVENUE  $18,219,959    100.0%  $16,396,018    100.0%  $1,823,941    11.1%
COST OF REVENUE   13,017,646    71.4%   11,113,922    67.8%   1,903,724    17.1%
GROSS PROFIT   5,202,313    28.6%   5,282,096    32.2%   79,783    1.5%
                               
OPERATING EXPENSES                              
Selling expenses   161,719    0.9%   273,841    1.7%   (112,122)   (40.9)%
General and administrative expenses   1,367,070    7.5%   1,310,215    8.0%   56,855    4.3%
Research and development expenses   205,359    1.1%   522,867    3.2%   (317,508)   (60.7)%
Total operating expenses   1,734,148    9.5%   2,106,923    12.9%   (372,775)   (17.7)%
                               
INCOME FROM OPERATIONS   3,468,165    19.0%   3,175,173    19.4%   292,992    9.2%
                               
OTHER INCOME (EXPENSE)                              
Interest expense, net   (328,388)   (1.8)%   (330,919)   (2.0)%   (2,531)   0.8%
Other income, net   514,802    2.8%   145,576    0.9%   369,226    253.6%
Total other income (expenses), net   186,414    1.0%   (185,343)   (1.1)%   371,757    (200.6)%
                               
INCOME BEFORE INCOME TAX PROVISION   3,654,579    20.1%   2,989,830    18.2%   664,749    22.2%
                               
PROVISION FOR INCOME TAXES   556,262    3.1%   427,194    2.6%   129,068    30.2%
                               
NET INCOME  $3,098,317    17.0%  $2,562,636    15.6%  $535,681    20.9%

  

Revenues

 

We currently produce our products for our customers in three broad product categories: fragrance compounds, health supplemental powder drinks and bioactive food ingredients.

 

Revenues were $18,219,959 for the year ended September 30, 2020, an increase of $1,823,941, or approximately 11.1% as compared to $16,396,018 for the year ended September 30, 2019. Specifically, the increase in revenues was primarily attributable to (i) an increase in sales volume of fragrance ingredients and bioactive food ingredients by 6.5% and 116.0%, respectively, due to increased customer orders and average order size, especially when our major product, stachyose, has been selected and recommended by local government as an important supplemental material to produce COVID-19 pandemic control related drugs and substances. (ii) an increase in average selling price of fragrance compound products and health supplement (powder drinks) products by 11.9% and 5.9%, respectively, as we raised our selling prices in response to the rising raw material costs; (iii) a decrease in selling price of our bioactive food ingredient products by 42.7% when we lowered the selling price to stimulate customer orders which resulted in a 116.0% increase in sales volume of bioactive food ingredient products, and (iv) a 1.9% negative impact from foreign currency fluctuation when average exchange rate used in converting RMB into USD changed from US$1 to RMB 6.8767 in 2019 to US$1 to RMB 7.0066 in 2020, which are discussed in greater details below.

 

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The following table summarizes the breakdown of revenues by categories for the periods indicated.

 

   Revenues 
   For the Years Ended September 30, 
   2020   2019   Change   Change 
   US$   %   US$   %   Amount   % 
   (Amount in US$, except percentage) 
Fragrance compounds   7,879,300    43.3%   6,738,274    41.1%   1,141,026    16.9%
Health supplements (powder drinks)   3,887,096    21.3%   4,342,490    26.5%   (455,394)   (10.5)%
Bioactive food ingredients   6,453,563    35.4%   5,315,254    32.4%   1,138,309    21.4%
Total Revenue   18,219,959    100.0%   16,396,018    100.0%   1,823,941    11.1%

  

Revenues from sales of our fragrance compound products

 

Our fragrance compound products primarily include natural compounds extracted from plants for cosmetic applications, such as sclareolide and ambroxide, a sustainable replacement to ambergris, a secretion by sperm whales.

 

Revenues from sales of our fragrance compound products increased by 16.9% or $1,141,026 to $7,879,300 in fiscal year 2020 from $6,738,274 in fiscal year 2019. This increase was primarily attributable to the following: (i) a 6.5% increase in sales volume from 39,222 kilograms in fiscal year 2019 to 41,765 kilograms in fiscal year 2020, because of increased customer orders for our fragrance compounds products containing sterilization and disinfection effects. Due to COVID-19 outbreak and spread, we changed our sales strategy to put more marketing effort to promote our sales to large domestic enterprise clients. As a result, the average customer order size increased by 28.7% in 2020 as compared to 2019; (ii) a 11.9% increase in average selling price of our fragrance compound products because of our adjusted pricing strategy to partially pass though the increase of raw material purchase costs to our customers. Our raw material purchase costs associated with fragrance compound products increased by approximately 23.7% during fiscal year 2020 as compared to fiscal year 2019; and (iii) partially offset by an 1.9% negative impact from exchange rate fluctuation when average exchange rate used in converting RMB into USD increased from US$1 to RMB 6.8767 in 2019 to US$1 to RMB 7.0066 in 2020.

 

Revenues from sales of our health supplement (powder drinks) products

 

Our health supplement (powder drinks) products primarily include stachyose series with benefits such as intestine rejuvenation and probiotic proliferation acceleration, and milk thistle extracts with benefits to protect liver and lower blood sugar.

 

Revenues from sales of health supplement (powder drinks) products deceased by 10.5% or $445,394 to $3,887,096 in fiscal year 2020 from $4,342,490 in fiscal year 2019. This decrease was attributable to the following: (i) a decrease of 13.9% in sales volume from 216,949 cases in fiscal year 2019 to 186,781 cases in fiscal year 2020 primarily due to the temporary closure of our manufacturing plant and our limited business activities during the period from the beginning of February to March 2, 2020, as required by the local government of Xi’an province to prevent the COVID-19 pandemic spread. As a result, we had difficulty to fulfil customer orders and timely deliver our products to customers due to logistic disruptions caused by the COVID-19 during this period of time; (ii) a 1.9% negative impact from exchange rate fluctuation when average exchange rate used in converting RMB into USD increased from US$1 to RMB 6.8767 in 2019 to US$1 to RMB 7.0066 in 2020; and (iii) partially by a slight increase in average selling price by 5.9% as a result of our adjusted pricing strategy in response to market change and the increase of raw material costs. Our raw material purchase costs associated with our health supplement (powder drinks) products increased by approximately 5.2% during in fiscal 2020, as compared to fiscal 2019.

 

Revenues from sales of our bioactive food ingredient products

 

Our bioactive food ingredient products primarily include fruit juice concentrates and extracts for a variety of health benefits that can’t be sufficiently sourced from daily dietary intakes, such as fruit concentrates, apple polyphenol, rich in anti-oxidant and derived from apple, and phloretin, an anti-oxidant with skin discoloration effect extracted from leaves and roots of apple, pear and other fruits.

 

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Revenues from sales of our bioactive food ingredient products increased by 21.4% or $1,138,309 to $6,453,563 for the year ended September 30, 2020 from $5,315,254 in fiscal year 2019. The increase was mainly attributable to the following: (i) a 116.0% increase in sales volume from 59,544 kilograms in fiscal year 2019 to 128,617 kilograms in fiscal year 2020. In response to the COVID-19 outbreak, China’s National Health Commission recommended the use of supplements regulating the human gut microbiome as one of the potential treatments for COVID-19 patients. Our VIE, Xi’an App-Chem, together with other companies engaged in manufacturing of bio-medicine, traditional Chinese medicine, medical equipment, medical supplies, key raw materials, and essential living materials have been selected by the local government of Xi’an province as qualified key enterprises to provide products or supplies to combat against the COVID-19. Our stachyose, a representative product under our bioactive food ingredient product category and an important ingredient or materials used in manufacturing of probiotic supplement to boost digestive health and immunity and fight off the bad bacteria and boost immunity, has been designated by the local government of Xi’an province as an important supplemental material to produce COVID-19 pandemic control related drugs and substances. As a result of government selection and recommendation, sales demand for our bioactive food ingredient products, especially Stachyose, increased significantly in fiscal 2020. In addition, through research and development, the extraction process for our Stachyose products has been improved during fiscal 2020, which led to our effective extraction of the ingredients out of raw materials from original 60% extraction ratio to current 95% extraction ratio, and accordingly helped us save the manufacturing cost, lower down our average unit cost and be more competitive. As a result, our raw material costs used in manufacturing of our bioactive food ingredient products decreased by approximately 4.3% in fiscal year 2020 as compared to fiscal year 2019; (ii) in response to COVID-19 pandemic, we lowered our selling price of Stachyose products by approximately 42.7% to stimulate customer orders while benefiting our community and making the product more affordable to our customers during the COVID-19 outbreak and (iii) the increase in our revenue from bioactive food ingredient products was also affected by a 1.9% negative impact from exchange rate fluctuation when average exchange rate used in converting RMB into USD increased from US$1 to RMB 6.8767 in 2019 to US$1 to RMB 7.0066 in 2020.

 

Cost of Revenues

 

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

 

Our cost of revenues increased by $1,903,724, or 17.1%, from $11,113,922 in fiscal year 2019 to $13,017,646 in fiscal year 2020. The increase in our cost of revenues was due to 35.9% and 15.2% increases in costs of revenues associated with our sales of fragrance compound and bioactive food ingredient products in fiscal year 2020, as compared to fiscal year 2019 when sales volumes of fragrance compound and bioactive food ingredient products increased by 6.5% and 116.0%, respectively. In addition, as discussed above, our raw material costs used in manufacturing of our bioactive food ingredient products decreased by approximately 4.3% as a result of optimizing our manufacturing process to improve the extraction yield of ingredients from raw materials used in manufacturing our bioactive food ingredient products during fiscal year 2020, as compared to fiscal year 2019, offset by an increase in average unit cost of our fragrance compound products and health supplement (powder drinks) products by 27.6% and 5.6% respectively, when raw material purchase costs increased in 2020, and a 1.9% negative impact from foreign currency fluctuation when the average exchange rate used in converting RMB into USD increased from US$1 to RMB 6.8767 in 2019 to US$1 to RMB 7.0066 in 2020, as discussed in details below.

 

   For the years ended September 30, 
   2020   2019   Change 
   Amount   Amount   Amount   % 
                 
Cost of revenues – Fragrance compound products  $6,261,301   $4,608,534   $1,652,767    35.9%
Cost of revenues – Health supplement (powder drinks)  $2,756,009   $3,032,290   $(276,281)   (9.1)%
Cost of revenues – Bioactive food ingredients  $4,000,336   $3,473,098   $527,238    15.2%
Total cost of revenues  $13,017,646   $11,113,922   $1,903,724    17.1%

 

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Cost of Revenues from sales of our fragrance compound products

 

The 35.9% increase in cost of revenues for our fragrance compound products from $4,608,534 in fiscal year 2019 to $6,261,301 in fiscal year 2020 was mainly attributable to the following: (i) an increase of 6.5% in sales volume due to stronger demand for some of our fragrance compounds products containing sterilization and disinfection effects. Average customer order size increased by 28.7% in 2020 as compared to 2019; (ii) an increase of 27.6% in weighted average unit cost for this product category when raw material purchase costs increased by 23.7%, especially higher raw material costs in connection with our newly launched product clary sage concrete, during fiscal year 2020, as compared to fiscal year 2019; and (iii) partially offset by a 1.9% negative impact from foreign currency fluctuation when the average exchange rate used in converting RMB into USD increased from US$1 to RMB 6.8767 in 2019 to US$1 to RMB 7.0066 in 2020.

 

Cost of Revenues from sales of our health supplement (powder drinks) products

 

The 9.1% decrease in cost of revenues for our health supplement (powder drinks) products from $3,032,290 in fiscal year 2019 to $2,756,009 in fiscal year 2020 was mainly attributable to the following; (i) a decrease of 13.9% in sales volume because of the negative impact from COVID-19, which caused our temporary closure of our manufacturing facilities and our limited business activities, as required by the local government of Xi’an province to prevent the COVID-19 pandemic spread, during the period from the beginning of February to March 2, 2020, which was the peak selling season of our health supplement (powder drinks) products. As a result, we had difficulty to fulfil customer orders and timely deliver our products to customers due to logistic disruptions caused by the COVID-19 during this period of time; (ii) a 1.9% negative impact from foreign currency fluctuation when the average exchange rate used in converting RMB into USD increased from US$1 to RMB 6.8767 in 2019 to US$1 to RMB 7.0066 in 2020; and (iii) partially offset by an increase of 5.6% in weighted average unit cost for this product category, when raw material purchase costs increased by 5.2% in fiscal year 2020, as compared to fiscal year 2019.

 

Cost of Revenues from sales of our bioactive food ingredient products

 

The 15.2% increase in cost of revenues for our bioactive food ingredient products from $3,473,098 in fiscal year 2019 to $4,000,336 in fiscal year 2020 was mainly attributable to the following: (i) an increase of 116.0% in sales volume when our major product stachyose has been selected by the local government of Xi’an province as one of the important supplemental materials to produce COVID-19 pandemic control related drugs and substances and when we lowered the selling price of stachyose by approximately 43.8% to stimulate customer purchase orders. Average customer order size increased by 28.7% in 2020 as compared to 2019; (ii) on the other hand, we have optimized our manufacturing process of our bioactive food ingredient products by improving the effective extraction of the ingredient out of raw materials from original 60% extraction ratio to current 95% extraction ratio, which enabled us to save the manufacturing cost, and lower down our average unit cost by 46.7% to be more competitive; (iii) a 1.9% negative impact from foreign currency fluctuation when the average exchange rate used in converting RMB into USD increased from US$1 to RMB 6.8767 in 2019 to US$1 to RMB 7.0066 in 2020.

 

Gross Profit

 

   For the years Ended September 30,   Change 
(in US dollars, except percentage)  2020   2019   Amount   % 
Gross Profit  $5,202,313   $5,282,096   $(79,783)   (1.5)%
Gross Profit Margin   28.6%   32.2%        (3.6)%

 

Our gross profit in fiscal year slightly decreased by $79,783, or approximately 1.5% from $5,282,096 in fiscal year 2019 to $5,202,313 in fiscal year 2020. Our gross margin decreased by 3.6% from 32.2% in fiscal year 2019 to 28.6% in fiscal year 2020. The decrease in gross profit and gross margin was due to (i) a decrease in the average selling price of our bioactive food ingredient products by 42.7% as we lowered down our selling price to stimulate customer orders and we achieved optimization of our manufacturing process to improve the extraction ratio and reduced our costs as discussed above; and (ii) an increase of weighted average unit costs of our fragrance compound and health supplement (powder drinks) products by 27.6% and 5.6%, respectively as raw material costs of these two product categories increased. The decrease in our gross profit and margin was also affected by changes in our product mix sold because more lower margin product has been sold in fiscal year 2020, as compared to in fiscal year 2019.

 

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Gross profit from sales of our fragrance compound products

 

Gross profit of our fragrance compound products decreased by $511,742 or 24.0% from $2,129,740 in fiscal year 2019 to $1,617,999 in fiscal year 2020. The decrease was primarily attributable to (i) an increase of 27.6% in weighted average unit cost for this product category when raw material purchase costs increased, especially higher raw material costs in connection with our newly launched product clary sage concrete, in fiscal year 2020, as compared to fiscal year 2019; (ii) a 1.9% negative impact from foreign currency fluctuation when average rate used in converting the RMB into USD increased, and partially offset by (iii) an increase of 6.5% in sales volume due to stronger demand for some of our fragrance compounds products containing sterilization and disinfection effects and (iv) an increase of 11.9% in average selling price as we raised our selling price in response to the rising raw material cost. As a result, gross margin for our fragrance compound products decreased by 11.1% from 31.6% in fiscal year 2019, to 20.5% in fiscal year2020.

 

Gross profit from sales of our health supplement (powder drinks) products

 

Gross profit of our health supplement (powder drinks) products decreased by $179,113 or 13.7% from $1,310,200 in fiscal year 2019, to $1,131,087 in fiscal year 2020. The decrease was primarily attributable to (i) a decrease of 13.9% in sales volume due to the temporary closure of our manufacturing facilities and our limited business activities, as required by the local government of Xi’an province to prevent the COVID-19 pandemic spread during the period from the beginning of February to March 2, 2020, which was the peak selling season of our health supplement (powder drinks) products. The decrease in sales volume and revenue reduced our profitability; (ii) an increase of 5.6% in weighted average unit cost for this product category due to increased raw material purchase costs; (iii) a 1.9% negative impact from foreign currency fluctuation when average rate used in converting the RMB into USD increased, partially offset by (iii) a 5.9% increase in average selling price as a result of our adjusted pricing strategy in response to market change and the increase of raw material costs. As a result, gross margin for our health supplement (powder drinks) products decreased by 1.1% from 30.2% in fiscal year 2019 to 29.1% i fiscal year 2020.

 

Gross profit from sales of our bioactive food ingredient products

 

Gross profit of our bioactive food ingredient products increased by $611,071 or 33.2%, from $1,842,156 in fiscal year 2019 to $2,453,227 in fiscal year 2020. This increase was primarily due to (i) an increase of sales volume by 116.0% because our major product stachyose has been selected by the local government as one of important supplemental materials to produce COVID-19 pandemic control related drugs and substances and we also lowered down the selling price of stachyose by 42.7% to stimulate customer purchase orders. Average customer order size increased by 28.7% in 2020 as compared to 2019. This led to an increase in revenue from our bioactive food ingredient products by $1.14 million or 21.4% in fiscal year 2020 as compared to fiscal year 2019; (ii) a decrease of 46.7% in weighted average unit cost for this product category because we have optimized our manufacturing process of our bioactive food ingredient products by improving the effective extraction of the ingredient out of raw materials from original extraction ratio of 60% to current extraction ratio of 95%, which enabled us to save the manufacturing cost; and partially offset by (iii) a 1.9% negative impact from foreign currency fluctuation when average rate used in converting the RMB into USD increased. As a result, gross margin for bioactive food ingredient products increased by 3.4% from 34.7% in fiscal year 2019, to 38.0% in fiscal year 2020.

 

Selling expenses

 

   For the Years Ended September 30,   Change 
(in US dollars, except percentage)  2020   2019   Amount   % 
Selling Expenses  $161,719   $273,841   $(112,122)   (40.9)%
as a percentage of revenues   0.9%   1.7%        (0.8)%

 

Selling expenses decreased by $112,122, or approximately 40.9%, from $273,841 in fiscal year 2019 to $161,719 in fiscal year 2020. Due to COVID-19 outbreak and impact, we reduced the participation in trade shows and reduced the business travels. As a result, trade show related marketing expenses decreased by $37,575 and business travel expenses decreased by $27,740 in fiscal year 2020 as compared to fiscal year 2019. In addition, our export sales to overseas customers also decreased due to logistic disruptions caused by the COVID-19, as a result, shipping and delivery expenses decreased by $22,014. Furthermore, we changed our sales and promotion strategy from traditional in-person marketing to online or virtual marketing and promotion of our products to customers, in response to the COVID-19 spread, as a result, sales commission paid to our sales personnel also decreased by $18,532. The overall decrease in our selling expense reflected the above combined factors.

 

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General and administrative expenses

 

  

For the Years Ended

September 30,

   Change 
(in US dollars, except percentage)  2020   2019   Amount   % 
General and Administrative Expenses  $1,367,070   $1,310,215   $56,885    4.3%
as a percentage of revenues   7.5%   8.0%        (0.5)%

 

General and administrative expenses increased by $56,855, or approximately 4.3%, from $1,310,215 in fiscal year 2019 to $1,367,070 in fiscal year 2020, mainly attributable to (i) an increase in audit fee of $220,600 in connection with our intended IPO in the United States; (ii) an increase in accrued penalty of $247,823 due to our large unpaid VAT tax associated with our CIP project. As of September 30, 2020, we had approximately $3.2 million VAT tax liabilities related to our ongoing CIP project to construct a new manufacturing facility, with which approximately 90% of the main body of the facilities has been completed and is expected to pass government inspection before September 30, 2021. We believe that the unpaid VAT tax liabilities will be settled when the CIP project passes the government inspection. However, for the year ended September 30, 2020, we accrued possible penalty for late tax payment based on statutory penalty rate; (iii) a decrease in business travel, meals and entertainment fee of $45,405 because we reduced business travel and related activities due to COVID-19 outbreak and spread; (iv) a decrease of $240,181 in professional fees related to legal and consulting services. Our VIE, Xi’an App-Chem was previously listed on National Equities Exchange and Quotations (“NEEQ”) in China on June 8, 2016, and voluntarily ceased the listing on May 31, 2019 in order to pursue listing on a senior exchange in the United States. In connection with the delisting from NEEQ, we incurred higher legal fee and professional consulting fee in fiscal year 2019, as compared to fiscal year 2020; and (iv) a decrease of $13,353 in office rent and miscellaneous office expenses as we cut costs during the COVID-19 pandemic. The overall decrease in our general and administrative expense reflected the above combined factors.

 

Research and development (“R&D”) expenses

 

  

For the Years Ended

September 30,

   Change 
(in US dollars, except percentage)  2020   2019   Amount   % 
Research and Development Expenses  $205,359   $522,867   $(317,508)   (60.7)%
as a percentage of revenues   1.1%   3.2%        (2.1)%

 

Research and development expenses decreased by $317,508, or approximately 60.7%, from $522,867 in fiscal year 2019 to $205,359 in fiscal year 2020. The decrease was mainly due to (i) a decrease of $127,065 outsourcing expenses because we incurred higher outsourcing expenses in 2019 to external research and development teams to help us to conduct R&D in order to improve the extraction process for our Stachyose products, which eventually led to our effective extraction of the ingredients out of raw materials from original 60% extraction ratio to current 95% extraction ratio, and accordingly helped us save the manufacturing cost, lower down our average unit cost and be more competitive. We did not pay such outsourcing costs to external R&D teams in fiscal 2020 due to COVID-19 impact; (ii) a decrease of $77,912 in materials consumption in R&D activities, and (iii) an decrease of $60,389 in salaries and welfare related to R&D personnel because of reduced headcount of R&D personnel from 10 personnel in fiscal year 2019 to 8 personnel in  fiscal 2020.

 

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Other income (expenses)

 

Other income (expenses) primarily includes interest income generated from our bank deposits, interest expenses incurred on our borrowings from various banks and financial institutions, government subsidy income, rental income, income from technology transfer and unrealized foreign currency exchange gain due to our export sales.

 

   For the years ended
September 30,
   Change 
(in US dollars, except percentage)  2020   2019   Amount   % 
Interest expense, net  $(328,388)  $(330,919)  $2,531    (0.8)%
Foreign currency exchange gain (loss)   (248)   5,281    (5,529)   (104.7)%
Gain on disposal of fixed assets   20,150    -    20,150    100.0%
Other income, net                    
-Government grants   362,187    140,295    221,892    158.2%
-Income from technology transfer   93,824    -    93,824    100.0%
-Rental income  $38,889   $-   $38,889    100.0%

 

Interest expense, net, decreased by $2,531, or approximately 0.8% as compared to the prior year. The decrease was mainly attributable to decreased average loan balances we carried in fiscal 2020 as compared to fiscal 2019.

 

Government subsidy income primarily relate to local government’s cash award to High and New Technology Enterprises (“HNTEs”) based on their financial performance to encourage entrepreneurship and stimulate local economies. Such awards are granted on a case-by-case basis by various local governments. The Company’s VIE, Xi’an App-chem was approved as a HNTE and received government subsidy in the form of an export sales refund and cash awards based on our annual financial performance. The Company recognizes government subsidies as other operating income when they are received because they are not subject to any past or future conditions, there are no performance conditions or conditions of use, and they are not subject to future refunds. Government subsidies received in the form of a grant and recognized as other operating income totalled $362,187 and $140,295 for the years ended September 30, 2020 and 2019, respectively.

 

In fiscal year 2020, our VIE, Xi’an App-chem, sold a manufacturing process related technology to a third party and generated other income of RMB684,540 (equivalent to US$93,824) from such technology transfer. There was no such income in fiscal year 2019.

 

In fiscal year 2020, our VIE, Shaanxi Appchem, leased office space to a third-party and recorded rental income of RMB272,477 (equivalent to $38,889). There was no such income in fiscal year 2019.

 

In fiscal year 2020, we also disposed certain fixed assets and realized a gain of $20,150 from such disposal.

 

The overall changes in our other income (expenses) reflected the above major factors.

 

Provision for Income Taxes

 

Our provision for income taxes was $556,262 in fiscal year 2020, an increase of $129,068, or 30.2% from $427,194 in fiscal year 2019 due to our increased taxable income. Under the EIT Law, domestic enterprises and Foreign Investment Enterprises (“FIEs”) are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on a case-by-case basis. EIT grants preferential tax treatment to High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for their HNTE status every three years. The corporate income taxes for the years ended September 30, 2020 and 2019 were reported at a blended reduced rate as a result of Xi’an App-chem being approved as a HNTE and enjoying a 15% reduced income tax rate, but subsidiaries of Xi’an App-chem are subject to a 25% income tax rate. The impact of the tax holidays noted above decreased foreign taxes by $372,517 and $314,080 for the years ended September 30, 2020 and 2019, respectively. The benefit of the tax holidays on net income per share (basic and diluted) $0.07 and $0.06 for the years ended September 30, 2020 and 2019, respectively.

 

Net income

 

As a result of the foregoing, our net income increased from $2,562,636 in fiscal year 2019 to $3,098,317 in fiscal year 2020.

 

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Liquidity and Capital Resources

 

As reflected in the Company’s consolidated financial statements, the Company had negative working capital of approximately $0.9 million as of September 30, 2020. In addition, the Company is currently constructing a new manufacturing plant. As of September 30, 2020, the Company had future minimum capital expenditure commitment on its construction-in-progress project of approximately $0.6 million within the next twelve months. The Company also had large unpaid tax liabilities of approximately $4.4 million, which are expected to be settled with local tax authorities within one year. Furthermore, the ongoing outbreak of COVID-19 may continue to negatively impact the Company’s business operations. A resurgence could negatively affect the Company’s ability to fulfil customer sales orders and collect customer payments timely or disrupt the Company’s supply chain. As a result, there is a possibility that the Company’s revenue and cash flows may underperform in the next 12 months.

 

In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its operating and capital expenditure commitments. As of September 30, 2020, we only had cash on hand of $53,106. We also had outstanding accounts receivable of approximately $5.8 million, of which approximately $5.6 million or 96.9% has been subsequently collected. Cash collection from accounts receivable become available for use as working capital.

 

As of September 30, 2020, we had outstanding bank loans of approximately $5.0 million from several PRC banks (including short-term bank loans of approximately $1.3 million, current portion of long-term bank loans of approximately $1.2 million and long-term loan of approximately $2.5 million). We expect that we would be able to renew all of our existing bank loans upon their maturity based on past experience and our good credit history. From October 2020 to March 31, 2021, we secured an aggregate of $1.5 million (RMB 10.5 million) loans with PRC banks and financial institutions as working capital loan (see Note 18). In addition to the current borrowings, from April and December 2020, we secured an aggregate of $8.7 million (RMB 59 million) lines of credit with PRC banks as working capital loan (including $2.2 million line of credit with Huaxia Bank for one to three years, $1.9 million line of credit with Bohai Bank for one year, $2.6 million line of credit with Bank of China and $1.9 million (RMB 13 million) line of credit with Qishang Bank for one to three years) (see Note 10 and Note 18). As of the date of this filing, we had borrowed $1.6 million (RMB 11 million) out of these lines of credit and had the availability to borrow an additional maximum loans of RMB48 million (approximately $7.1 million) under these lines of credit before April 2023.

 

Currently, we are working to improve our liquidity and capital sources primarily through cash flows from operation, debt financing and financial support from our principal shareholder. We currently plan to support our ongoing CIP project construction through cash flows from operations and bank borrowings. We also plan to settle the $4.4 million tax liabilities before September 30, 2021. The above mentioned $7.1 million unused line of credit may be able to cover future minimum CIP expenditure of $0.6 million and $4.4 million unpaid tax liabilities within the next 12 months from the date of this filing. Furthermore, our controlling shareholder, Mr. Yongwei Hu, also made pledges to provide continuous financial support to our Company for at least next 12 months from the issuance of our consolidated financial statements.

 

In order to fully implement our business plan and sustain continued growth, we may also seek equity financing from outside investors. At the present time, however, we do not have commitments of funds from any potential investors. No assurance can be given that additional financing, if required, would be available on favorable terms or at all.

 

Based on the current operating plan, management believes that the above-mentioned measures collectively will provide sufficient liquidity for the Company to meet its future liquidity and capital requirement for at least 12 months from the date the audited financial statements were issued.

 

In light of the effects of the ongoing COVID-19 outbreak and spread as discussed above, if we are required to operate in a challenging economic environment in China, if we incur unanticipated capital expenditures, or if we decide to accelerate our growth, we may need additional financing. We cannot guarantee, however, that additional financing, if required, would be available at all or on favorable terms. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.

 

In the coming years, we will be exploring other financing sources, such as raising additional capital by issuing shares of stock, to meet our cash needs. While facing uncertainties in regard to the size and timing of capital raises, we are confident that we can continue to meet operational needs by utilizing cash flows generated from our operating activities, debt financing and working-capital funds provided by shareholders, as necessary.

 

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

 

   For the Fiscal Years Ended
September 30,
 
   2020   2019 
Net cash provided by operating activities  $2,643,076   $7,104,822 
Net cash used in investing activities   (3,003,043)   (8,429,958)
Net cash provided by financing activities   112,492    804,680 
Effect of exchange rate change on cash   (6,810)   (6,629)
Net increase (decrease) in cash   (240,665)   (527,085)
Cash, beginning of year   293,771    820,856 
Cash, end of year  $53,106   $293,771 

 

Cash flows from operating activities

 

Net cash provided by operating activities during the year ended September 30, 2020 was $2,643,076, primarily attributable to (i) net income of $ 3,098,317 for the year ended September 30, 2020, (ii) a decrease of $1,636,321 inventory due to increased sales in fiscal year 2020 and our strengthened inventory management strategy to control unnecessary inventory stockpile to save cost. (iii) an increase of $3,021,739 in advance to suppliers for raw material purchase. As of the date of this prospectus, the September 30, 2020 advance to suppliers balance has been fully realized when the Company received purchased raw materials from suppliers. (iv) an increase of $2,662,542 in tax payable mostly due to accrued and unpaid value added tax payable. As of September 30, 2020, we had approximately $3.2 million VAT tax liabilities related to our ongoing CIP project to construct a new manufacturing facility, with which approximately 90% of the main body of the facilities has been completed and is expected to pass government inspection before September 30, 2021. We believe that the unpaid VAT tax liabilities will be settled when the CIP project passes the government inspection. (v) a decrease of $1,982,205 in accounts payable because we arranged the payment to suppliers to settle the outstanding accounts payable when we received the invoices from suppliers.

 

Net cash provided by operating activities during the year ended September 30, 2019 was $7,104,822, primarily due to (i) net income of $2,562,636 for the year ended September 30, 2019, (ii) a decrease of $6,681,972 inventory due to more finished products being sold for the year ended September 30, 2019, (iii) an increase of $2,912,222 account receivable due to increased sales for the year ended September 30, 2019, and (iv) an increase of $1,538,662 taxes payable for the year ended September 30, 2019 due to increased taxable income.

 

Cash flows from investing activities

 

Net cash used in investing activities for the year ended September 30, 2020 was $3,003,043 which was primarily attributable to the purchase of property and equipment in the amount of $31,885, capital expenditure on construction-in-progress in the amount of $4,301,103 and partially offset by a refund of acquisition deposit of $1,329,945, which was made during 2019 and collected in 2020 after termination of the intended acquisition.

 

Net cash used in investing activities for the year ended September 30, 2019 was $8,429,958 which was primarily attributable to the purchase of property and equipment in the amount of $213,634, capital expenditure on construction-in-progress in the amount of $6,861,257 and an acquisition deposit of $1,305,407 made during 2019, which was subsequently refunded.

 

Cash flows from financing activities

 

Net cash provided by financing activities for the year ended September 30, 2020 was $112,492, primarily include proceeds from short-term loans of $2,033,570, proceeds from long-term loans of $319,342, proceeds from borrowings from related parties of $1,067,808, proceeds from third-party loans of $238,133, offset by repayment of short-term loans of $2,872,778, repayment of capital lease in the amount of $392,030, and payment for deferred initial public offering costs of $281,553 in connection with our intended IPO.

 

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Net cash provided by financing activities for the year ended September 30, 2019 was $804,680, which was primarily due to proceeds from bank borrowings in the amount of $4,008,293, proceeds from related party borrowings in the amount of $543,976, principal payment from capital lease in the amount of $432,722, and capital contribution from non-controlling interest in the amount of $435,964, partially offset by repayment of bank borrowing of $4,514,482. 

 

During the year ended September 30, 2020, we experienced a net decrease in cash of $240,665.

 

Our operations have, in part, been financed by short-term and long-term debt. As of September 30, 2020, the current balance of our short terms loans was $1,289,081. This balance consisted of loans with one-year terms and interest rates ranging from 2.0% to 18.0% per year. Our long-term borrowings consist of: (1) a loan from Huaxia Bank dated April 16, 2020 with a three-year term, and the maturity dates have been subsequently extended to February and December 2022 and (2) a loan from Shenzhen Qianhai Micro Public Bank Co., Ltd dated January 19, 2020 with a 27-month term. The balance of our long-term borrowings, net of current portion, was $2,482,251 as of September 30, 2020. Our long-term debt, as well as some of our short-term loans, are guaranteed and secured by the personal assets of our CEO and largest shareholder, Mr. Hu.

 

Research and Development, Patents, and Licenses

 

During the year ended September 30, 2020, we expended in $205,359 in research and development, compared to $522,867 for the prior year. We hold several patents issued by the PRC, relating primarily to composition and processing techniques for products and product ingredients. These include 8 patents issued to Xi’an App-Chem Bio (Tech) Co., Ltd., 3 patents issued to our wholly owned subsidiary Xi’an Yanhuang TCM Medical Research & Development Co., Ltd., and 1 patent issued to our wholly owned subsidiary Xi’an Dietary Therapy Health Management Co., Ltd.

 

We are a national high-tech enterprise, and our research and development investment has remained at approximately 5% of its sales revenue over the years. In the future, the proportion of research and development expenses as a percentage of revenues is expected to gradually increase despite the lower level experienced in 2020 due to the outbreak of COVID-19 pandemic. We have invested in R&D to develop bio-manufacturing processes for natural active components and functional health products that are precisely adjusted and controlled by human micro-biome. Our primary research and development efforts for our raw materials and ingredients business are focused on the development of innovative bio-manufacturing processes for products like clary sage and stachyose. Upon completion of these efforts, we expect to significantly increase our gross margin, our production capacity, and our sales revenues for these products. Our primary research and development efforts for our functional health business are focused on the development of health solutions based on the precise regulation and control of immunity and digestion by human micro-biome. These products are functional foods and functional personal care products that we expect to provide significant sales growth in the near future. Our products have not been approved as effective in treating or preventing any health conditions and/or diseases by a regulatory agency in the PRC.

 

Research and development for our raw materials and ingredients business is performed by our in-house team in our laboratory and its subordinate factories. Most of the research and development for our functional health business is also carried out in our laboratories, with additional research carried out by cooperative external laboratories. This research and development is funded solely by the Company, and we retain all resulting intellectual property rights. Although our R&D efforts have been adequately funded through operations, we expect to accelerate our efforts significantly through the use of additional capital, including the funds sought in this offering.

 

Off Balance Sheet Arrangements

 

As of September 30, 2020, there were no off-balance sheet arrangements. 

 

Tabular Disclosure of Contractual Obligations

 

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

 

   Payments Due by Period 
Contractual Obligations  Total   Less than 1 year   1-3 years   3-5 years   More than 5 years 
(1) Debt Obligations  $5,689,005   $3,206,754   $2,482,251    -     
(2) Capital Lease Obligations  $33,389    33,389    -         
(3) Capital expenditure commitment obligations on CIP project  $1,505,601   $630,402   $342,859    532,340     
Total  $7,227,995   $3,870,545   $2,825,110   $532,340      

 

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(1) As of September 30, 2020, we had total $5,689,005 short-term and long-term borrowings from several PRC banks and financing institutions and third-parties (including short-term loans of $1,289,081, current portion of long-term loans of $1,227,346, short-term third-party loans of $690,327 and long-term loans of $2,482,251) (see Footnote 10 – Debt, for details).

 

(2) A two-year capital lease agreement with Guian Hengxin Finance Lease (Shanghai) Ltd. (“the Lessor”). Under the arrangement, the Lessee sells part of its plant machines to the lessor and leased them back from the lessor.

 

(3) Construction-in-progress (“CIP”) represents direct costs of construction incurred for the Company’s manufacturing facilities. On August 16, 2017, the Company’s VIE, Xi’an App-Chem Bio(Tech)Co.,Ltd. started to construct a new manufacturing plant in Tongchuan City (“Tongchuan Project”) , Shaanxi Province, with total budget of RMB 95 million (approximately $14.0 million) for construction of the main body of the manufacturing plant, plant decoration and purchase of machinery and equipment. As of September 30, 2020, the Company has spent approximately RMB84.3million (approximately $12.4 million) on the construction of the main body of the manufacturing plant and future minimum capital expenditure on this CIP project is estimated to be approximately $1.5 million), among which approximately $0.6 million is required for the next 12 months (see Note 8). The construction of this new manufacturing facility is expected to be fully completed and put into production by March 2022.

 

Legal proceedings

 

We are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, may result in substantial cost and diversion of our resources, including our management’s time and attention.

 

Quantitative and Qualitative Analysis about Market Risk

 

Foreign Exchange Risk

 

Foreign currency risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. Substantially all of our revenue-generating transactions, and a majority of our expense-related transactions, are denominated in Renminbi, which is the functional currency of our operations. We do not hedge against currency risk.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would reduce the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares, servicing outstanding debts, or for other business purposes, appreciation of the U.S. dollar against the Renminbi would reduce the U.S. dollar amounts available to us.

 

Our functional currency is the RMB, and our financial statements are presented in U.S. dollars. The RMB appreciated by 4.7% during the twelve months ended September 30, 2020. The RMB depreciated by 1.3% in fiscal year 2019. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying changes in our business or results of operations. Currently, our assets, liabilities, revenues and costs are denominated in RMB.

 

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Interest Rate Risk

 

We are not currently exposed to interest rate risk. We do not own any interest-bearing instruments and our interest-bearing debt carries a fixed rate.

 

Market Price Risk

 

We are not currently exposed to commodity price risk or market price risk.

 

Inflation

 

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

 

Seasonality

 

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

 

Critical Accounting Policies and Estimates

 

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

 

Risks and Uncertainties

 

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

 

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

 

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

 

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

 

Uses of estimates

 

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

 

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Accounts receivable, net

 

Accounts receivable are presented net of allowance for doubtful accounts. We determine the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trend. We establish a provision for doubtful receivables when there is objective evidence that we may not be able to collect amounts due. The allowance is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the collection is not probable. Allowance for uncollectable balances amounted to $93,032 and $73,386 as of September 30, 2020 and 2019, respectively.

 

Inventories, net

 

Inventories are stated at net realizable value using weighted average method. Costs include the cost of raw materials, freight, direct labor and related production overhead. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products. The Company evaluates inventories on a quarterly basis for its net realizable value adjustments, and reduces the carrying value of those inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable value based on various factors including aging, expiration dates, as applicable, taking into consideration historical and expected future product sales. We recorded inventory reserve of $439,486 and $389,867 as of September 30, 2020 and 2019, respectively.

 

Revenue recognition

 

On October 1, 2017, the Company adopted Accounting Standards Codification (“ASC”) 606 using the modified retrospective approach.

 

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

 

In accordance to ASC 606, the Company recognizes revenue when it transfers its goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. The Company accounts for the revenue generated from sales of its products to its customers, in which the Company is acting as a principal in these transactions, is subject to inventory risk, has latitude in establishing prices, and is responsible for fulfilling the promise to provide customers the specified goods. All of the Company’s contracts have single performance obligation as the promise is to transfer the individual goods to customers, and there is no other separately identifiable promises in the contracts. The Company’s revenue streams are recognized at a point in time when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company’s products are sold with no right of return and the Company does not provide other credits or sales incentive to customers. The Company’s sales are net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities in respect of product sales.

 

Contract Assets and Liabilities

 

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

 

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Disaggregation of Revenues

 

We disaggregate our revenue from contracts by product types, as we believe it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The summary of our total revenues by product categories for the years ended September 30, 2020 and 2019 was as follows:

 

Revenue by region

 

  

For the year ended

September 30,

 
   2020   2019 
PRC  $15,461,801   $11,192,324 
Overseas   2,758,158    5,203,694 
Total revenue  $18,219,959   $16,396,018 

 

Revenue by product categories

 

The summary of our total revenues by product categories for the periods indicated was as follows:

 

  

September 30,

2020

  

September 30,

2019

 
Fragrance compounds  $7,879,300   $6,738,274 
Health supplements (powder drinks)   3,887,096    4,342,490 
Bioactive food ingredients   6,453,563    5,315,254 
Total revenue  $18,219,959   $16,396,018 

 

Income Tax

 

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

 

An uncertain tax position is recognized only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. As of September 30, 2020, the Company had income tax payable of approximately $0.85 million, primarily related to the unpaid income tax in China. Based on statutory penalty rate, the Company recorded an accrued penalty of $24,942 as reflected in the consolidated statements of income and comprehensive income. The Company expects to settle the income tax liabilities in May 2021 when the 2020 annual income tax return is to be filed with local tax authority.

 

Our operating subsidiary and VIE in China are subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the fiscal years ended September 30, 2020 and 2019. As of September 30, 2020, and September 30, 2019, all of the Company’s tax returns of its PRC subsidiary, its VIE and VIE’s subsidiaries remain open for statutory examination by PRC tax authorities.

 

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Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The new guidance requires the lessee to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. In July 2018, FASB issued ASU 2018-11 Leases (Topic 842) – Targeted Improvements that reduces costs and eases implementation of the leases standard for financial statement preparers. The ASU simplifies transition requirements and, for lessors, provides a practical expedient for the separation of non-lease components from lease components. In March 2019, the FASB issued Accounting Standards Update No. 2019-01, Leases (Topic 842): Codification Improvements (“ASU 2019-01”). ASU 2019-01 provides guidance on transition disclosures related to Topic 250, Accounting Changes and Error Corrections, specifically paragraph 205-10-50-3, which requires entities to provide in the fiscal year in which a new accounting principle is adopted the identical disclosures for interim periods after the date of adoption. The guidance in ASU 2019-01 explicitly provides an exception to the paragraph 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements. In November 2019, FASB released ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which modified the implementation date of the standard. For public entities, the guidance will be effective for fiscal year beginning after December 15, 2018 and interim periods therein. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. In June 2020, FASB released ASU No. 2020-05 in response to the ongoing impacts to US businesses in response to the coronavirus (COVID-19) pandemic. ASU No. 2020-05 provides a limited deferral of the effective dates for implementing ASU 842 to give some relief to businesses and the difficulties they are facing during the pandemic. Private companies and non- profit entities may defer the adoption of ASU 842 to fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. As an emerging growth company, the Company plans to adopt this guidance effective October 1, 2022. The Company does not expect the cumulative effect resulting from the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As an emerging growth company, the Company plans to adopt this guidance effective October 1, 2023. The Company is currently evaluating the impact of its pending adoption of ASU 2016-13 on its consolidated financial statements.

 

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

 

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

 

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

 

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

 

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OUR INDUSTRY

 

All the information and data presented in this section have been derived from independent research organizations and sources. The following discussion projections for future growth, which may not occur at the rates that are projected or at all.

 

OVERVIEW OF THE MACROECNOMIC ENVIRONMENT IN THE PRC

 

Per Capita Annual Disposable Income

 

 

Source: National Bureau of Statistics of China

 

According to the National Bureau of Statistics of China, during the previous five years, consistent with the steady economic growth, per capita annual disposable income in China rose from RMB20,200 or US$3,279 in 2014 to RMB28,200 or US$ $4,315 in 2018, representing a CAGR of approximately 9.0% from 2014 to 2018. The rise in disposable income contributes to improvements in living standards and increase in health awareness. It is expected that the per capita annual disposable income in the PRC will grow from RMB30,600 or US$4,450 in 2019 to RMB43,200 or US$6,282 under constant exchange rate in 2023, with a CAGR of approximately 8.9%.

 

Relevant Dynamics in The Healthcare Industry

 

Healthcare is among one of the largest sectors of the Chinese economy. The 2018 Statistical Bulletin on the Development of China’s Health and Wellness Industry shows that the total health expenditure of China in 2018 is expected to reach RMB5,800 billion or US$998 billion, among which, social health expenditure was RMB2,495 billion or US$382 billion, representing 43.0% and personal health expenditure was RMB1,666 billion or US$256 billion, representing 28.7%. The total health expenditure per capita is RMB4,148 or US635. The total health expenditure accounted for 6.4% of China’s GDP in 2018.

 

The Chinese Government is actively endorsing policies to increase health outcomes for its citizens. According to the Healthy China Action (2019-2030), by 2030, the Chinese Government seeks to improve the health awareness of the general public, which will lead to greatly improved, healthy lifestyles, the average life expectancy will be increased.

 

The healthcare industry in China will continue to develop. According to Industry Planning and Enterprise Development Strategy in China’s Great Health Sector by Forward Industry Research Institute, Great Health industry was RMB2.6 trillion or US$402.5 billion in 2011 and rose to RMB6.2 trillion or US$929.5 billion in 2017, representing a CAGR of approximately 15.6%. China’s healthcare industry will reach RMB 7 trillion or US$1.1 trillion, and exceed RMB 10 trillion or US$1.5 by 2020. The annual compound annual growth rate in the next five years (2019-2023) is projected to be12.6%, and China’s healthcare industry is expected to reach RMB 14.1 trillion or US2.1 trillion in 2023.

 

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Market Size of Nutritional and Dietary Supplements in China

 

 

Source: Forward Industry Research Institute

 

The nutritional and dietary supplements industry in China has experienced rapid growth in the past decade. In 2011, market size of the sector was RMB85.6 billion or US$13.3 billion and grew at a CAGR of 20.9% to RMB 331 billion or US$49.9 billion in 2018 according to the research report by Forward Industry Research Institute. The industry is expected to reach RMB727 billion or US$105.7 billion in 2023 from RMB409 billion in 2019, representing a CAGR of approximately 15.5%.

 

Market Drivers

 

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

 

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

 

61
 

 

Business

 

Overview

 

Xi’an App-Chem Bio (Tech) Co., Ltd (“Xi’an App-Chem Bio (Tech)”) was established in 2006. The company is located in the state-level Xi’an Hi-tech Development Zone. “Quality, innovation, value” is the core concept of Xi’an App-Chem. Xi’an App-Chem focuses on the field of natural products, and our mission is to create value by providing high-quality innovative products and services for customers. Xi’an App-Chem operates through nine subsidiaries:

 

  Shaanxi App-Chem Health Industry Co., Ltd. (App-Chem Health)
     
  Xi’an Yanhuang TCM Medical Research and Development Co., Ltd. (“Xi’an YH”)
     
  Shaanxi App-Chem Ag-tech Co., Ltd. (“App-Chem Ag-tech”)
     
  Xi’an Dietary Therapy Health Management Co., Ltd. (“Xi’an DT”)
     
  Tongchuan Dietary Therapy Health Technology Co., Ltd. (“Tongchuan DT)
     
  Balikun Tianmei Bio (Tech) Co., Ltd. (“Balikun”)
     
  App-Chem Bio (Tech) (Guangzhou) Co., Ltd. (“App-Chem Guangzhou”)
     
  Gansu Baimeikang Bioengineering Co., Ltd.; (“Gansu BMK”) and
     
  Tianjin Yonghexiang Bio (Tech) Co., Ltd. (“ Tianjin YHX”)

 

We were co-founded by a team of top-level executives from China’s domestic natural products industry, together with experts returned from overseas. For the past 10 years, we have focused on the core needs of the natural products industry, emphasizing technological innovation and supply chain integration. We are devoted to providing a stable supply of high-quality products and services at competitive prices for the functional food, personal care, cosmetic and pharmaceutical industries. “Nourish life with natural essence” is our business concept, and “Becoming an innovative leader of natural functional ingredients and an integrated supplier for the health industry” is our goal. We have formed four technology platforms as follows:

 

  1. Commercial scale natural ingredient extraction and separation platform built with technologies such as continuous dynamic extraction and molecular distillation and membrane separation (“Technical Platform 1”);
     
  2. Natural extraction safety improvement and assurance platform designed with technology to remove heavy metal, pesticide, and other harmful residues (“Technical Platform 2”);
     
  3. Platform of bioactive ingredient of natural extract enhancement built with technology seeking to increase human absorption rate of naturally extracted ingredients by increasing their water solubility and utilizing drug delivery system (“Technical Platform 3”); and
     
  4. Natural extract formulation technology platform based on steady state technology with focus on formulation of natural anti-oxidant and functional oligosaccharide to achieve stable output, high purity and absorption rate (“Technical Platform 4”).

 

The four technical platforms are utilized throughout the production process of our products with applications illustrated as follows:

 

Technical Platform 1. Commercial scale natural ingredient extraction and separation platform:

 

  Clary Sage concrete is produced by continuous countercurrent extraction, from clary sage;
  Sclareol is produced by molecular distillation separation from clary Sage concrete;
  Stachyose is produced by biological enzymatic hydrolysis-membrane method efficient and continuous separation from stachys affinis; and
  Apple polyphenol is produced with high-efficiency membrane separation from apples.

 

Technical Platform 2. Natural extraction safety improvement and assurance platform:

 

  Solvent residues are removed in the process of producing ambroxide and Sclareolides with purity in order to maintain aroma when used in fragrance products;
  Carbendazim and other pesticide residues are removed in the process of producing apple polyphenols to parts per billion (“PPB”) level in accordance to applicable food safety regulations; and
  Heavy metals and other metal ions are removed in producing stachyose and the ash content is as low as 0.01%, for product safety purpose, while improving product quality and flavor.

 

Technical Platform 3. Bioactive ingredient of natural extract enhancement

 

  Mainly used in dietary supplement products currently in early commercial development stage with applications of technology such as water solubility enhancement and drug delivery system to seek higher absorption rate by human and to yield with more active ingredients.

 

Technical Platform 4. Natural extract formulation technology platform

 

  Mainly used in dietary supplement products currently in early commercial development stage with applications of technology such as molecule steady state technology and anti-oxidants to seek consistent product quality and extended shelf life.

 

With the combination and application of the above technology platforms, we seek to produce products with high quality assurance.

 

In addition, based on our technology for rehabilitation of the human microbiome, cell death regulation, and anti-aging product development, we are able to provide products and services advantageous in terms of cost, safety, performance, function and other aspects for customers in the food, personal care, cosmetics and pharmaceutical industries.

 

The services provided to our customers include customized product development and formulation and after-sale and technical support. These services are value-added provided to our customers to enhance customer loyalty and our competitiveness in the marketplace.

 

Product Categories

 

Fragrance compounds:

 

  Clary sage extract products (Sclareol, Sclareolide, Ambroxide, Clary Sage Oil, Clary Sage Concrete);
     
  Lavender essential oil;

 

While some perfumers may still use the expensive and hard-to-find substance ambergris, which is produced in the intestines of sperm whales, the industry now increasingly uses a substance known as “ambroxide,” synthesized from the compound “sclareol” found in clary sage plant. Ambroxide is used both as a fragrance and as a “fixative” for making scents linger longer in products. Made by our proprietary microbial fermentation process and molecular distillation technology, our ambroxide products are produced with higher purity and yield than industry average. Based on product testing reports, we have determined that our ambroxide products are produced with 99.5% purity and above, while the industry average is approximately 99.0%. The yield of our ambroxide production is approximately 63%. Our management believes the industry average yield for ambroxide production to be approximately 40% to 43%.

 

Health supplements (natural, functional active ingredients for powder drinks):

 

Based on our accumulations in natural functional components separation, biological activity research, product application development, natural product supply chain and other areas, we are able to provide a host of solutions for functional food (health products, nutrients, etc.), functional personal care products (whitening, moisturizing, anti-acne, etc.), natural medicine and other needs, including formulation development, ingredients supply, and product OEM. In addition, we have launched new over-the-counter products, including Bon Natural Micro-eco Hair Repair Shampoo; Tianmei Jinghao Nutrition Powder.  We are also in the development stage of more innovative products using natural, functional ingredients intended for the precise regulation and control of the humane micro-biome. Examples include our DuiJiuDangGe (JiuGe) and Gout Ease (Feng Qing Ping). Our products have not been approved as effective in treating or preventing any health conditions and/or diseases by a regulatory agency in the PRC.

 

Bioactive food ingredients:

 

  Stachyose (P60, P70, P80)
     
  Milk thistle extracts (various solvent Silymarin, Silybin, Water-soluble silymarin and silybin);
     
  Apple extracts (Apple polyphenol, Apple dietary fiber, Phloridzin, Phloretin)
     
  Pomegranate extract products (Ellagic acid, Punicalagin,Urolithin)

 

Aside from macronutrients such as carbohydrates, proteins, and fatty acids, the term “bioactive food ingredients” refers to natural compounds, mainly from plant foods, with specific physiological functions. These include flavonoids, phenolic acids, organic sulfides, terpenoids and carotenoids, coenzyme Q, γ-aminobutyric acid, melatonin, and L-carnitine and other biologically active ingredients derived from animal food. These ingredients are believed to participate in the regulation of physiology and pathophysiology, such that food containing these ingredients is believed to have specific functions in addition to basic nutrition.

 

Our biologically active food ingredients and their main uses are as follows:

 

1. Apple polyphenol: widely used in high-end personal care products such as weight loss, blood lipid reduction, anti-aging beauty, whitening, anti-wrinkle and other high-end personal care products.

 

2. Stachyose: Stachyose is a prebiotic, which can promote the proliferation of human intestinal probiotics. It is widely used in dairy products, health drinks, personal care, health care products, ice cream, Chinese medicine, and other industries.

 

3. Milk thistle extract: A flavonoid derived from the plant milk thistle. It is known to have (but has not been scientifically proven to have) liver protection, anti-inflammatory, anti-tumor and blood pressure effects. It is used to seek to improve liver diseases caused by alcohol and environmental toxins.

 

4. Pomegranate extract: A plant-extracted polyphenol with potential effects of anti-oxidation, anti-aging, blood pressure lowering and whitening effects, and can be used in food, medicine and cosmetics.

 

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Our Manufacturing Process

 

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

 

 

63
 

 

Our health supplements (powder drinks) are made with naturally extracted active ingredients. For example, stachyose is a single prebiotic, which seeks to accelerate proliferation of bacillus bifidus. Used together with other prebiotic bacteria, it helps greatly in adjusting intestinal bacteria groups, relieving constipation and keeping intestines youthful and perpetually healthy. Our quality control is throughout the entire production and starts souring from the farms with superior quality. The first step is anti-degradation extraction with a special protective agent followed by continuous resin chromatographic separation and purification to produce high purity stachyose.

 

Our fragrance compound products are plant-based natural extracts widely used as fixatives in fragrance, detergent, health supplements and tobacco flavoring. There are three different products being produced along our proprietary manufacturing process, Sclareol, Sclareolide and Ambroxide. Our manufacturing process of clary sage products can be summarized as: i) continuous countercurrent extraction to ensure faster, more efficient and higher yield than traditional extraction methods; ii) molecular distillation to improve evaporation velocity, and liquid film distribution as well as to reduce heating time and degradation of thermo-sensitive materials; iii) biological transformation with water as media, thus no chemical or heavy metal residues; followed by catalytic reduction; and iv) supramolecular crystal reconstruction to produce our fine ambroxide for use in fragrance or detergent fixatives.

 

An example of our bioactive food ingredients is apple polyphenols, which are major antioxidants extracted from apples and may contribute to color, flavor, odor and oxidative stability. Therefore, apple polyphenols are widely used in various applications, including health supplements, cosmetics, and food preservation. Our proprietary manufacturing process of apple polyphenols principally involves the following steps: continuous anti-oxidant extraction, and continuous resin chromatographic separation and purification.

 

Intellectual Property

 

Patents

 

As a result of our collection of academic and technological expertise, as of September 30, 2020, we had 12 approved patents and 1 applying patent in China, as set forth in the following table:

 

No   Patent Name   Patent No./
Application No.
  Authorization Date/
Application Date
  Status   Period   Holder   Type
1   Method for separating sclareol   ZL 2008 1 0231943.X   July 20, 2011   Authorized   20 years   Xi’an App-Chem   Invention
                             
2   Preparation method of applephenon   ZL 2010 1 0179259.9   October 5, 2011   Authorized   20 years   Xi’an App-Chem   Invention
                             
3   Method for preparing osthole   ZL 2010 1 0531931.6   February 8, 2012   Authorized   20 years   Xi’an App-Chem   Invention
                             
4   Process for separating imperatorin from osthole extract waste liquid   ZL 2010 1 0531934.X   April 11, 2012   Authorized   20 years   Xi’an App-Chem   Invention
                             
5   Method for preparing punicalagin and ellagic acid from pomegranate rind   ZL 2010 1 0531940.5   May 23, 2012   Authorized   20 years   Xi’an App-Chem   Invention
                             
6   Molecular distillation and purification method for conjugated linolenic acid   ZL 2010 1 0531945.8   August 15, 2012   Authorized   20 years   Xi’an App-Chem   Invention
                             
7   Flatstem milkvetch seed solid beverage and preparation method thereof   ZL 2010 1 0531836.6   December 5, 2012   Authorized   20 years   Xi’an App-Chem   Invention

 

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8   Method for extraction separation of rutin of tartary buckwheat   ZL 2013 1 0645312.3   March 2, 2016   Authorized   20 years   Xi’an App-Chem   Invention
                             
9   Method for synthesizing luteolin   ZL 2010 1 0531920.8   August 22, 2012   Authorized   20 years   Xi’an YH   Invention
                             
10   Method for preparing baicalin   ZL 2010 1 0531839.X   September 26, 2012   Authorized   20 years   Xi’an YH   Invention
                             
11   Synthetic method of biapenem drug intermediate 4-AA   ZL 2013 1 0632993.X   July 13, 2016   Authorized   20 years   Xi’an YH   Invention
                             
12   Functional instant tea and preparation technology thereof   ZL 2015 1 0294685.X   January 15, 2019   Authorized   20 years   Xi’an DT   Invention
                             
13   A method for separating high content catalpa from Rehmannia glutinosa and high content Rehmannia glutinosa polysaccharidepolysaccharide   202010802236.22   August 11, 2020   Pending   20 years   Xi’an App-ChemChem   Invention

 

Key Suppliers and Customers

 

We enjoy a broad network of raw materials suppliers and customers and distributors. Our relationships with our customers and suppliers are based on standardized terms for the supply of specific products with a specific ingredient purity, referred to as content %. Payment terms are a mixture of cash on delivery and a specifically-agreed maximum days payable outstanding (“DPO”).

 

Below is a tabular summary of our relationships with our most important suppliers:

 

Supplier Name   Product Name   Use   Terms

Molbase

(Shanghai) Biotechnology

Co., Ltd.

  Clary sage extract   Raw materials for fragrance and perfume   Procure for the Company by Molbase as the trade platform with commission fee, cash on delivery
   Stachys affinis extracts   Raw materials for stachyose, one of health supplements   Procure for the Company by Molbase as the trade platform with commission fee, cash on delivery
  Ambroxide   Raw materials for fragrance and perfume   Procure for the Company by Molbase as the trade platform with commission fee, cash on delivery

Jiaxing

Molbase

Information

Technology

Co., Ltd.

  Ambroxide   Raw materials for fragrance and perfume   Procure for the Company by Molbase as the trade platform with commission fee, cash on delivery
  Neohesperidin dihydrochalcone (NHDC)   For food sweeteners   Procure for the Company by Molbase as the trade platform with commission fee, cash on delivery
  Milk thistle extracts   Raw materials for bioactive food ingredients   Procure for the Company by Molbase as the trade platform with commission fee, cash on delivery

Dali Zhengxin

Species Co., Ltd.

  Ambroxide   Raw materials for fragrance and perfume   Content: 95%, centralized supply in specific days payable outstanding (DPO)

 

The principal raw materials used for our production are various natural and plant-based extracts. Raw material purchases from suppliers which individually exceeded 10% of the Company’s total raw material purchases, accounted for approximately 57.7% (two suppliers) and 49.0% (three suppliers) of our total raw material purchases for the years ended September 30, 2020 and 2019. Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect our business, financial position and results of operations.

 

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Below is a tabular summary of our relationships with our most important customers:

 

Customer Name   Product Name   Application   Terms
Tianjin Mingrunbaili Trade Co., Ltd.   Clary sage extract   Fragrance and perfume   Special specification product, long-term cooperation in specific days payable outstanding (DPO)
  Stachyose   Bioactive food ingredients   Special specification product, long-term cooperation in specific days payable outstanding (DPO)
Shanghai Yunsheng International Trade Co., Ltd.   Apple polyphenol   Health supplement (powder drinks)   70% content, low pesticide residue, long-term cooperation in specific days payable outstanding (DPO)
  Milk thistle extracts   Bioactive food ingredients   30% content, low solvent residue, long-term cooperation in specific days payable outstanding (DPO)
OQEMA Ltd   Ambroxide   Fragrance and perfume   99% content, long-term cooperation in specific days payable outstanding (DPO)
Symrise Private Limited   Ambroxide   Fragrance and perfume   99% content, long-term cooperation in specific days payable outstanding (DPO)

 

We sell our products primarily through direct distributors in the PRC and, to some extent, to overseas customers in Europe. For the year ended September 30, 2020, three customers accounted for 29.0%, 27.2% and 14.1% of the Company’s total revenue, respectively. For the year ended September 30, 2019, three customers accounted for 17.2%, 12.1% and 10.2% of the Company’s total revenue, respectively

 

Marketing and Competition

 

Market Focus — Raw Materials and Ingredients and Functional Health

 

Our product sales are carried out by two departments – Raw Materials and Ingredients and Functional Health. Our Raw Material Ingredients Department sells natural active ingredients such as stachyose, apple polyphenol, Ambroxide, and others to customers in the functional food and personal care industries, accounting for around 70% of the company’s total sales. The Functional Health Department focuses on human micro-biome adjustment and control products, providing small and medium-sized customers in the Chinese domestic Big Health industry with one-stop solutions from product design, research and development, and procurement to OEM in digestive health, metabolic health, immune health and other fields. The Functional Health Department accounts for about 30% of the company’s overall business. Our marketing efforts are focused in two areas – the international market and the domestic Chinese market. The international market is dominated by raw materials and ingredients, while the domestic market is primarily focused on functional health.

 

Our raw materials and ingredients businesses are promoted through exhibitions, professional journals, academic conferences, and social platforms (social broadcasting), with academic promotion of professional knowledge and general scientific knowledge being the main methods. We are committed to promoting and maintaining our brand image in the natural ingredients industry. Our brands and slogans, such as App-Chem, App-Chem Stachyose for Healthy Digestion in China (“天美水苏糖,健康中国肠”), App-Chem Cares Life (“天然至美呵护生命至美”). are well recognized and widely praised in the industry. We have established a strong and widely known reputation in the international natural products industry, especially in the field of micro-biome health.

 

Our functional health business focuses on adjustment and control of the micro-biome and focuses on immune health and digestion health as the target market. The Company promotes itself through exhibition, social platforms (stachyose social broadcasting), and Internet promotions (Ning Xiang Tang Nutrition Powder, and Tianmei Jinghao Nutrition Powder). Through continuous efforts, the Company has established a sound reputation in the Great Health industry and has become a preferred supplier for several leading clients both at home and abroad.

 

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Leading Competitors

 

Our main competitors are suppliers of functional ingredients, nutrition food, and traditional Chinese medicine functional food in the Big Health industry. They are as follows:

 

QHT- a leading probiotics supplier in China

 

Quantum Hi-Tech (China) Biotechnology Co., Ltd., publicly listed in 2010, is a national hi-tech enterprise committed to micro-ecology health. As a leading enterprise in the micro-ecological health industry, Quantum Bio has brands like Oligo, and Sheng He Tang, and operates the largest production site of oligosaccharide in China. QHT focuses on the field of probiotics with products like oligosaccharide and galactooligosaccharide, which can regulate intestinal microecological balance in dual manner by stimulating beneficial bacteria and inhibiting harmful bacteria. These products have been identified by the Public Nutrition and Development Center of the Macro Economy Institution of the National Development and Reform Commission as advocacy products of nutrition and health, and emerging products with wide-ranging and promising applications. In 2013, Forbes China included QHT in its Top 200 Listed Small- and Medium-sized Asian Enterprises. QHT and its logo are a well-known trademark in China. As of March 2020, QHT’s total market value reached US $1 billion.

 

Chenguang Biotech (CCGB)- a leading natural ingredients supplier in China

 

Chenguang Biotech Group Co., Ltd., another publicly listed company, has twenty subsidiaries and is an export- and foreign-exchange-generation-oriented enterprise which integrates intensive processing of agricultural products and extract of natural plants. It mainly develops and produces natural colors, natural spice extracts and essential oils, natural nutrition and medicinal extracts, and protein oils. Among its products, the production and sales volume of natural colors is the highest in China, and that of capsanthin the highest in the world. Its chili extracts account for over 85% of total domestic output for that product. Its lutein, beet red and other varieties occupy a significant share of world production. As of March 2020, the total market value of Chenguang Biotech Group Co., Ltd. reached ¥ 4.7 billion.

 

Tong Ren Tang- a leading producer of traditional Chinese medicine and health products in China

 

Beijing Tong Ren Tang (Group) Co., Ltd., a wholly state-owned company, is authorized by the municipal government to operate state-owned assets. It was founded in 1669, with a history of 343 years. The group adheres to the development strategy of “taking modern traditional Chinese medicine as the core, developing life and health industry, and becoming an internationally renowned modern traditional Chinese medicine group”. It takes “growing, strengthening and expanding” as its policy, and takes innovation and technology as its mission. Its sales revenue, profits, export earnings and the number of overseas terminals rank first in the industry in China. Since 1997, Tong Ren Tang has maintained sustained and healthy development, with its economic indicators reaching double-digit growth for 15 consecutive years, doubling every five years. As of 2011, the group has a total asset of ¥14 billion, a sales revenue of ¥16.3 billion, a profit of ¥1.316 billion, and foreign exchange earnings of $33.92 million. It has set up 64 pharmacies and 1 overseas production and research base in 16 overseas countries and regions. Its products are sold to more than 40 overseas countries and regions.

 

At the same time, Tong Ren Tang’s dual function of being both an economic entity and a cultural carrier has become increasingly apparent. It has achieved fruitful results in brand maintenance and promotion, cultural innovation and inheritance. The “Tong Ren Tang traditional Chinese medicine culture” has been approved as one of the first items to be included in the List of National Intangible Cultural Heritage. It has signed a strategic cooperation framework agreement with the Confucius Institute Headquarters (Hanban) to jointly promote Tong Ren Tang traditional Chinese medicine culture and has further strengthened the overseas dissemination of Tong Ren Tang Culture by using the Confucius Institute platform. As of March 2020, Tong Ren Tang’s total market value reached ¥ 34.3 billion.

 

BY-HEALTH- a leading supplier of nutrients by indirect selling in China

 

Founded in October 1995, BY-HEALTH introduced dietary supplements into China’s indirect selling market systematically in 2002. It has since grown rapidly into a leading brand and benchmark enterprise of dietary supplements in China. In August 2010, Yao Ming, the former international basketball superstar, signed contract to become its brand ambassador. On December 15, 2010, BY-HEALTH was listed on the Growth Enterprise Market (GEM) of Shenzhen Stock Exchange.

 

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For more than a decade, BY-HEALTH has been adhering to differentiated global quality strategy in three steps, namely, from global raw materials procurement, to establishment of its global base for the sole purpose of supplying raw materials, and then to the establishment of a global self-owned organic farm. So far, BY-HEALTH has sources of raw materials from 23 countries and regions worldwide. It has set up 5 exclusive raw materials bases in Brazil, Australia and other places. Now, its own organic farms are under planning. BY-HEALTH will make unremitting efforts to select high-quality raw materials from all over the world, bringing together the essence of nutrition, and building a “United Nations” of nutrients that selects the best from the better. As of March 2020, the total market value of BY-HEALTH reached ¥ 27.2 billion.

 

Competitive Challenges and Advantages

 

Our competitors’ main advantages are as follows:

 

  Stronger business scale and capital strength – Our main competitors are listed public companies, with relatively longer development histories, larger business scales and stronger financial strength.
     
  Larger and more complete sales networks — Since our main competitors have larger business scales, their market sales networks are accordingly wider.
     
  Brand recognition – Due to the advantages of being well-identified public companies, their high levels of marketing and promotion and, in some cases, inherited historical advantages, our main competitors have greater brand recognition.

 

Compared with our main competitors, our advantages are mainly reflected in the following two aspects:

 

  More advanced technology and products – Our main competitors’ technologies are mainly traditional physical and chemical techniques such as extraction and separation. Relatively speaking, we employ more advanced bio-manufacturing technologies, which give us enormous disproportional advantage in production efficiency and cost (a cost advantage of 20% to 60% over our main competitors).
     
    In the production of ambroxide for example, unlike our main competitors who use chemical synthesis with lengthy and complex process, typically involving 10 steps, such as oxidation, crystallization and extraction at multiple stages as well as saponification reaction, we use a bio- technique that utilizes a six-step process in a mild environment, including bio-synthesis, continuous separation, reduction, extraction, cyclization and crystallization to achieve what we believe is higher yield and efficiency than the industry average. As another example, most of our competitors produce stachyose with the traditional approach, resin separation, which is a lower yield method due to its intermittent process. Our continuous process is differentiated by our use of bio-enzyme and bio-membrane separation and purification, which we believe leads to higher yield and purity.
     
  First-mover advantage – The primary market focus for our products is nutritional health and personal care adjusted and controlled by the human micro-biome. This relatively new and fast-growing product focus has been made possible by recent breakthroughs in human micro-biome technology. Unlike our main competitors, we are strongly focused on this rapidly expanding market. We believe this gives us an important first-mover advantage. We intend to use this growing market niche to achieve rapid development and growth without immediate and direct competitive pressure from larger firms. Our market network, financial strength, brand awareness, and other areas will gradually improve as the Company grows and develops. As we become as more powerful market player, we will become better positioned to compete with larger, more established companies.

 

Development and Expansion Strategy

 

The key components of our development and expansion strategy over the next two-to-three years are as follows:

 

Raw Material and Ingredients

 

Using our current projects as a foothold, we intend to expand our plants to increase productivity and enlarge our markets to ensure sustainable growth. Over the next two to three years, our raw materials and ingredients business will be centered on the Great Health market and focus on the core needs of the functional food and personal care industries. We view our current business in this area as foundation from which we can expand our plants, increase our productivity, improve our technology and equipment, optimize our supply chain, and broaden our sales channels to ensure a steady and sustainable growth. Management is committed to achieving a compound annual growth rate in this business line of no less than 30%.

 

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Functional Health

 

In our functional health business, we intend a rapid expansion focused on the development and introduction of innovative new products. Over the next two to three years, we will continue to place an intensive focus on human micro-biome health, and actively develop a series of functional food and personal care products featuring strong and fasting-acting effects on the respiratory and gastrointestinal areas of the human micro-biome. These products will be designed to take advantage of precise adjustment and regulation of the human micro-biome. The quality raw materials produced by our own natural ingredients business will provide us a significant cost advantage in these efforts.

 

History and Organizational Structure

 

We commenced our natural products and ingredients business through Xi’an App-Chem Bio(Tech) Co., Ltd. (“Xi’an App-Chem”) is a corporation formed in the People’s Republic of China in April of 2006. On April 23rd, 2006, Xi’an App-Chem received its Business License (Registration No.: 6101012116403) from the Xi’an Administration for Industry and Commerce.

 

On December 11, 2019, Bon Natural Life Limited was incorporated under the laws of the Cayman Islands as our offshore holding company to facilitate financing and offshore listing. Bon Natural Life Limited subsequently established a wholly-owned PRC subsidiary, Xi’an CMIT Due to PRC legal restrictions on foreign ownership in companies that conduct online sales in China, we carry out our business through Xi’an App-Chem, a domestic PRC company, equity interests in which are held by PRC citizens. Xi’an CMIT entered into a series of contractual arrangements, including a Loan Agreement, an Exclusive Service Agreement, a Shares Pledge Agreement, an Exclusive Option Agreement, and a Proxy Agreement and Power of Attorney, with Xi’an App-Chem and its shareholders, and obtained spousal consent letters by the spouses of the shareholders of Xi’an App-Chem. These shareholders are Yongwei Hu, Jing Liu, Wei Wang, Jianli Liu, Fangfang Dong, Kai Zhang, Huixia Guan, Yizhen Jia, Yanna An, and Weihua Liu, collectively holding 100% of equity interest in Xi’an App-Chem.

 

As a result of these contractual arrangements, we have effective control over, and are the primary beneficiary of, Xi’an App-Chem. Xi’an App-Chem is therefore our consolidated variable interest entity, or consolidated VIE, which generally refers to an entity in which we do not have any equity interests but whose financial results are consolidated into our consolidated financial statements in accordance with U.S. GAAP because we have effective financial control over, and are the primary beneficiary of, that entity. We treat Xi’an App-Chem and its subsidiaries as our consolidated affiliated entities under U.S. GAAP and have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP. However, those contractual arrangements may not be as effective in providing operational control as direct ownership. See “Risk Factors—Risks Related to Our Corporate Structure” and “Risk Factors—Risks Related to Doing Business in China.”

 

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The following diagram illustrates our corporate structure, including our subsidiary, the VIE, and the VIE’s subsidiaries, as of the date of this prospectus:

 

 

Note: Shareholders of Xi’an App-Chem are Yongwei Hu, Jin Liu, Wei Wang, Jianli Liu, Fangfang Dong, Kai Zhang, Huixia Guan, Yizhen Jia, Yanna An, Weihua Liu.

 

The following is a summary of the currently effective contractual arrangements by and among Xi’an CMIT, our wholly-owned subsidiary, Xi’an App-Chem Bio(Tech) Co., Ltd. (“Xi’an App-Chem”), our consolidated affiliated entity, and the shareholders of Xi’an App-Chem.

 

Agreements that provide us effective control over Xi’an App-Chem

 

Proxy Agreement and Power of Attorney

 

On May 28, 2020, Xi’an App-Chem and the shareholders of Xi’an App-Chem entered into a proxy agreement and power of attorney with Xi’an CMIT. Pursuant to the proxy agreement, each of the shareholders of Xi’an App-Chem irrevocably appointed Xi’an CMIT, as their attorney-in-fact to exercise all shareholder rights, including but not limited to: (i) calling for and attending shareholders meetings as the proxy of the shareholders; (ii) executing and delivering any and all written resolutions in the name and on behalf of the shareholders; (iii) voting by himself/herself or by proxy on any matters discussed on shareholders’ meetings, including without limitation, the sale, transfer, mortgage, pledge or disposal of any or all of the assets of Xi’an App-Chem; (iv) selling, transferring, pledging or disposing of any or all of the shares in the Xi’an App-Chem; (v) nominating, appointing or removing the directors of the Xi’an App-Chem when necessary; and (vi) exercising other rights granted to the shareholders by the articles of association of Xi’an App-Chem. Xi’an CMIT has the right to execute documents in connection with and perform other obligations under the shares pledge agreement and exclusive option agreement. Any conduct of Xi’an CMIT in connection with Xi’an App-Chem will be deemed as the conduct of the shareholders of Xi’an App-Chem. Any documents executed by Xi’an CMIT in connection with Xi’an App-Chem will be deemed to be executed by the shareholders of Xi’an App-Chem. Each of the shareholders of Xi’an App-Chem agreed to acknowledge, accept, and approve such conduct of or execution by Xi’an CMIT. The proxy agreement and power of attorney shall remain effective as long as the Xi’an App-Chem. Xi’an CMIT has the right to appoint, at its sole discretion, a substitute or substitutes to perform any or all of its rights of the Attorney-in-Fact under the proxy agreement, and to revoke the appointment of such substitute or substitutes. If and only if Xi’an CMIT sends a written notice to the shareholders of Xi’an App-Chem to replace its designated person, the shareholders of Xi’an App-Chem shall promptly appoint the replaced designated person as their new attorney-in-fact under their power of attorney. Otherwise, the authorization and appointment by the shareholders of Xi’an App-Chem’s shall not be revoked.

 

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Shares Pledge Agreement

 

On May 28, 2020, Xi’an CMIT, Xi’an App-Chem and the shareholders of Xi’an App-Chem entered into a shares pledge agreement, as amended and supplemented on June 10, 2020. Pursuant to the shares pledge agreement, except Yongwei Hu pledged his 17,075,008 shares in Xi’an App-Chem, each of other shareholders of Xi’an App-Chem pledged all of their shares in Xi’an App-Chem to guarantee their and Xi’an App-Chem’s performance of their obligations under the contractual arrangements, including the exclusive services agreement, the exclusive option agreement, and the loan agreement. If Xi’an App-Chem or its shareholders breach their contractual obligations under these agreements, Xi’an CMIT, as pledgee, will have the right to dispose of the pledged shares in Xi’an App-Chem and priority in receiving the proceeds from such disposal. The shareholders of Xi’an App-Chem also agreed that, during the term of the shares pledge agreement, they will not dispose of the pledged shares or create or allow any encumbrance on the pledged shares. During the term of the shares pledge agreement, Xi’an CMIT has the right to receive all of the dividends and profits distributed on the pledged shares. The share pledges become effective when the pledged shares contemplated in the shares pledge agreement are registered in accordance with the PRC Civil Code. The Pledge shall be continuously valid and the term of the Pledge ends at the earliest of the following three dates: (i) the date on which the unpaid secured obligation has been fully settled or otherwise repaid; (ii) the date on which the Pledgee exercises the Pledge in accordance with the terms and conditions of this Agreement to fully realize its rights to the secured obligation and the Pledged Shares; or (iii) the date on which the Pledgors have transferred all of its shares to a third party (natural or legal person) and no longer holds the Company’s shares in accordance with the Exclusive Option Agreement.

 

Loan Agreement

 

On May 28, 2020, Xi’an Cell and Molecule and the shareholders of Xi’an App-Chem entered into a loan agreement. Pursuant to the loan agreement, Xi’an CMIT will provide an interest-free loan in the amount of RMB70,000,000 to the shareholders of Xi’an App-Chem in the aggregate. The term of the Loan shall be 10 years from the date of this Agreement, which may be extended upon the mutual written consent of the Parties. The shareholders of Xi’an App-Chem agree and warrant to use the loan to increase the registered capital of Xi’an App-Chem. The loan agreement shall take effect as the date of the signing of the loan agreement. The loan agreement shall remain effective as long as the loan exists.

 

Exclusive Option Agreement

 

On May 28, 2020, Xi’an CMIT, Xi’an App-Chem and the shareholders of Xi’an App-Chem entered into an exclusive option agreement. Pursuant to the exclusive option agreement, each of the shareholders of Xi’an App-Chem irrevocably granted Xi’an CMIT an exclusive option to purchase, or have its designated entity or person to purchase, at its discretion, to the extent permitted under PRC laws, all or part of the shareholders’ shares in Xi’an App-Chem. The purchase price shall be equal to the loan provided by the Xi’an CMIT to the shareholders under the Loan Agreement. In addition, Xi’an App-Chem granted Xi’an CMIT an exclusive option to purchase, or have its designated entity or person, to purchase, at its discretion, to the extent permitted under PRC laws, all or part of Xi’an App-Chem’s assets. The purchase price also shall be equal to the loan provided by the Xi’an CMIT to the shareholders under the Loan Agreement. Without the prior written consent of Xi’an CMIT, the shareholders of Xi’an App-Chem may not increase or decrease the registered capital, dispose of its material assets, terminate any material contract or enter into any contract that is in conflict with its material contracts, appoint or remove any management members, distribute dividends to the shareholders, amend its articles of association or provide any loans to any third parties, and shall guarantee the continuance of Xi’an App-Chem. The exclusive option agreement shall be valid for ten (10) years, and may automatically be extended for another ten (10) years when expires. The exclusive option agreement may be extended for unlimited times.

 

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Agreement that allows us to receive economic benefits from Xi’an App-Chem

 

Exclusive Services Agreement

 

On May 28, 2020, Xi’an CMIT and Xi’an App-Chem have executed an exclusive service agreement. Under the exclusive service agreement, Xi’an CMIT has the exclusive right to provide Xi’an App-Chem with the technical and business support services required by Xi’an App-Chem’s business. Xi’an CMIT owns the exclusive intellectual property rights created as a result of the performance of this agreement. Xi’an App-Chem agrees to pay Xi’an CMIT an annual service fee. The annual service fee is calculated based on the revenue of Xi’an App-Chem and the corresponding operating cost and sales, management and other costs and expenses, and may be charged in the form of: (i) a percentage of the revenue of Xi’an App-Chem; (ii) a fixed license fee for certain software; and/or; (iii) other method determined from time to time by Xi’an CMIT according to the nature of services provided. The term of the exclusive service agreement is ten (10) years and shall be automatically extended for successive ten (10) years. Xi’an CMIT may terminate this Agreement, at its sole discretion, at any time with a written notice to Xi’an App-Chem given thirty (30) days in advance. Xi’an App-Chem has no right to terminate the exclusive service agreement.

 

Spousal Consents

 

On May 28, 2020, each of the spouses of the shareholders of Xi’an App-Chem signed a spousal consent letter. Under the spousal consent letters, each signing spouse unconditionally and irrevocably agreed that the spouse is aware of the abovementioned loan agreement, an exclusive service agreement, a shares pledge agreement, an exclusive option agreement, and a proxy agreement and power of attorney, and has read and understood the contractual arrangements. Each signing spouse committed not to impose any adverse assertions upon the validity and existence of such contractual arrangement based on the existence or termination of the marital relationship with the relevant shareholder of Xi’an App-Chem, or exert any impediment or adverse influence over the performance of any contractual arrangement by the shareholder of Xi’an App-Chem.

 

In the opinion of Chamzon Law Firm, our PRC legal counsel:

 

  the ownership structures of Xi’an App-Chem and Xi’an CMIT, both currently and immediately after giving effect to this offering, will not result in any violation of PRC laws or regulations currently in effect; and
     
  the contractual arrangements among Xi’an CMIT, Xi’an App-Chem and its shareholders governed by PRC laws both currently and immediately after giving effect to this offering are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.

 

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC government restrictions on foreign investment in our businesses, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors—Risks Related to Our Corporate Structure. —If the PRC government finds that the agreements that establish the structure for conducting certain of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations changes in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

 

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Xi’an App-Chem’s Operating Subsidiaries

 

The table below provides a summary of Xi’an App-Chem’s operating subsidiaries (“Bon Operating Companies”) and their primary business functions:

 

Name of Entity   Date of Incorporation   Place of Incorporation   % of Ownership   Principal Activities
Bon Natural Life   December 11, 2019   Cayman Islands   Parent, 100%   Investment holding
                 
Tea Essence   January 9, 2020   Hong Kong   100%   Investment holding
                 
Xi’an CMIT   April 9, 2020   Xi.an City, PRC   100%   WOFE, Investment holding
VIE of the Company:                
Xi’an App- Chem Bio (Tech)   April 23, 2006   Xi’an City, PRC   VIE   General administration and sales of the Company’s products to customers
Bon Operating Companies (owned by VIE)            
App-Chem Health   April 17, 2006   Tongchuan City, PRC   100% owned by VIE   Product manufacturing
App-Chem Ag-tech   April 19, 2013   Dali County, PRC   100% owned by VIE   Registered owner of land with an area of 12,904 square meters , no other business activities
Xi’an YH   September 15, 2009   Xi.an City, PRC   100% owned by VIE   Research and development of product
Balikun   December 16, 2016   Balikun City, PRC   100% owned by VIE   No active business operation
App-Chem Guangzhou   April 27, 2018   Guangzhou City, PRC   100% owned by VIE   Raw material purchase
Tongchuan DT   May 22, 2017   Tongchuan City, PRC   100% owned by VIE   Product manufacturing
Xi’an DT   April 24, 2015   Xi’an City, PRC   75% owned by VIE   Research and development of product
Tianjin YHX   September 16, 2019   Tianjin City, PRC   51% owned by VIE   Raw material purchase
Gansu BMK   March 11, 2020   Jiuquan City, PRC   100% owned by VIE   Raw material purchase

 

Property, Plants, and Equipment

 

Our current property and equipment consist of buildings, machinery, vehicles, and construction in progress with a total net book value of $14,171,963 as of September 30, 2020. Xi’an App-Chem has three facilities, one of which is in operation, one of which is under construction, and third site in the acquisition and planning stage:

 

Weinan Raw Materials and Ingredients Production Site

 

This site, located in Xuzhuang Industrial Park, Dali County, Weinan, Shaanxi, occupies an area of 30 mu, or approximately 5 acres (1 mu=0.165 acre) and a building area of 11,000 m2, or 118,403 square feet. It is rented by the Company at RMB 23,500 or $3,417 per month. It is equipped with a plant extract workshop (which has 4 sets of extraction equipment consisting of 6 m3 or 212 cubic feet multifunctional extraction tanks, 3 sets of concentration equipment, 14 sets of separation equipment and 23 sets of storage and transport equipment), a refining, drying, and packing workshop (2 sets of spray and drying towers, 6 sets of drying equipment, 2 sets of crushing equipment and over 20 other related equipment), a spices refinement workshop (70 sets of various production equipment with volume from 2000L to 5000L, 1 set of molecular distillation equipment, 1 set of water treatment equipment, 1 set of ash treatment equipment and 15 sets of refrigeration and pressure equipment). This facility mainly manufactures products in our clary sage series, apple polyphenols series, and stachyose products.

 

Tongchuan Functional Health Business Production Site

 

This site, located at the intersection of Datang Third Road and Changhong South Road, Southern Industrial Park, New Downtown District, Tongchuan, Shaanxi, covers an area of 24.8 mu or approximately 4.1 acres (1 mu=0.165 acre) and a construction area of 13,500 m2 or approximately 145,313 square feet. It is under construction and planned to establish 3 disinfection production lines, 2 production lines of powder drinks and pressed candies, 3 paste production lines, 2 production lines of special diets and 1 research and development center, quality inspection center, product exhibition center and a comprehensive office area. After completion, the value of this new plant’s total output is expected to reach up $150 million per year. The project is expected to be completed in March of 2022. As of September 30, 2020, the bulk of the required investment in this project ($12.5 million out of $14.00 million total cost) has been made. Management expects the remaining required expenditures to be funded through the Company’s operational cash flow. The Company has obtained a long-term land use certificate for this site. No additional expenditures or other conditions are required to maintain the sustainable land use right.

 

Yumen Raw Materials and Ingredients Production Site

 

We have been in the process of establishing the Yumen Raw Materials and Ingredients Production Site in Yumen, Gansu since April of 2020. This plant will cover an area of 50 mu or approximately 8 acres (1 mu=0.165 acre) at an investment of $2.85 million. It is currently in the “bidding, auction and listing” stage of land use right purchasing, and the timing of the completion of the purchase and subsequent development schedule is still uncertain at this point. The company expects to acquire the long-term land use right for this site at a cost of $250,000. The company is planning to staff approximately 35 employees, including 26 in production, 3 in quality control, 2 in R&D, 2 in finance, and 2 in office and administrative departments.

 

Employees

 

As of September 30, 2020, we had a total of 87 full time employees, of which 45 are in production, 5 are in quality control, 12 are in R&D, 13 are in sales and marketing, 7 are in finance and accounting, and 5 are in office and administration. We do not have any part time employees.

 

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REGULATIONS

 

This section sets forth a summary of the most significant rules and regulations that affect our business activities in China and the European Union or our shareholders’ rights to receive dividends and other distributions from us.

 

Regulations Relating to Foreign Investment in China

 

Industry Catalogue Relating to Foreign Investment.

 

Investment activities in China by foreign investors were principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which was promulgated and amended from time to time by the Ministry of Commerce, or MOFCOM, and the National Development and Reform Commission. The most updated Catalog was promulgated on June 28, 2017, and became effective on July 28, 2017, and contains specific provisions governing market access of foreign capital and stipulates in details the areas of entry on the categories of encouraged industries for foreign investment, restricted industries for foreign investment and prohibited industries for foreign investment. The Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2020), or the Negative List 2020, and the Catalog of Encouraged Industries for Foreign Investment (2020 Edition) were promulgated on December 27, 2020, and became effective January 27, 2020, which replaced the Catalog. According to the current regulation, any industry not listed in the Negative List 2020 is a permitted industry and is generally open to foreign investment unless specifically prohibited or restricted by PRC laws and regulations.

 

We are engaged in online sales. According to the Negative List 2020, the foreign investment in value-added telecommunications services provider shall not exceed 50% (excluding e-commerce, domestic multi-party telecommunication, storage, and forwarding business, and call center). Therefore, we provide online product sales through our consolidated VIE in China.

 

Foreign investment law

 

On March 15, 2019, the National People’s Congress, or the NPC, promulgated the PRC Foreign Investment Law of the PRC, or the Foreign Investment Law, which became effective on January 1, 2020, and replaced the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law, and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The organization form, organization, and activities of foreign-invested enterprises shall be governed, among others, by the PRC Company Law and the PRC Partnership Enterprise Law. Foreign-invested enterprises established in accordance with the Sino-foreign Equity Joint Venture Enterprise Law , the Sino-foreign Cooperative Joint Venture Enterprise Law, and the Wholly Foreign-invested Enterprise Law before the implementation of the Foreign Investment Law may retain the original business organization and so on within five years after the implementation of the Foreign Investment Law. The Foreign Investment Law provides that that foreign investment refers to investment activities directly or indirectly conducted within China by foreign natural persons, enterprises or other entities (the “foreign investors”), which include the following forms: (a) a foreign investor, individually or collectively with other investors, establishes a foreign-invested enterprise within PRC; (b) a foreign investor acquires stock shares, equity shares, property portions, or other like rights and interests of an enterprise within PRC; (c) a foreign investor, individually or collectively with other investors, invests in a new project within the PRC; and (d) other forms of investments under laws, administrative regulations, or provisions prescribed by the State Council of the PRC. It does not mention the relevant concept and regulatory regime of VIE structures and uncertainties still exist in relation to its interpretation and implementation.

 

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On December 26, 2019, the State Council promulgated the Implementing Regulations of the Foreign Investment Law of the PRC, or the FIE Implementing Regulations, which became effective on January 1, 2020. The FIE Implementing Regulations strictly implements the legislative principles and purpose of the Foreign Investment Law, it emphasizes on promoting and protecting the foreign investment and refines the specific measures. On the same day, the Supreme People’s Court issued the Interpretation on the Application of the Foreign Investment Law of the PRC, which also came into effect on January 1, 2020 and provides for interpretations on the application of laws in cases of investment contracts disputes between equal parties. This interpretation shall apply to any contractual dispute arising from the acquisition of the relevant rights and interests by a foreign investor by way of gift, division of property, the merger of enterprises, division of enterprises, etc.

 

According to the FIE Implementing Regulations, the registration of foreign-invested enterprises shall be handled by the State Administration for Market Regulation, or the SAMR or its authorized local counterparts. Where a foreign investor invests in an industry or field subject to licensing in accordance with laws, the relevant competent government department responsible for granting such license shall review the license application of the foreign investor in accordance with the same conditions and procedures applicable to PRC domestic investors unless it is stipulated otherwise by the laws and administrative regulations, and the competent government department shall not impose discriminatory requirements on the foreign investor in terms of licensing conditions, application materials, reviewing steps and deadlines, etc. However, the relevant competent government departments shall not grant the license or permit enterprise registration if the foreign investor intends to invest in the industries or fields as specified in the negative list without satisfying the relevant requirements. If a foreign investor invests in a prohibited field or industry as specified in the negative list, the relevant competent government department shall order the foreign investor to stop the investment activities, dispose of the shares or assets or take other necessary measures within a specified time limit, and restore to the status prior to the occurrence of the aforesaid investment, and the illegal gains, if any, shall be confiscated. If the investment activities of a foreign investor violate the special administrative measures for access restrictions on foreign investments as stipulated in the negative list, the relevant competent government department shall order the investor to make corrections within the specified time limit and take necessary measures to meet the relevant requirements. If the foreign investor fails to make corrections within the specified time limit, the aforesaid provisions regarding the circumstance that a foreign investor invests in the prohibited field or industry shall apply.

 

According to the Foreign Investment Law and the FIE Implementing Regulations, Xi’an CMIT has registered with the High-tech Branch of Xi’an Administration Industrial and Commercial Bureau. As the industry engaged by Xi’an CMIT is not listed in the Negative List 2020, it does not need to obtain any license from other relevant competent government departments.

 

Regulations Relating to Value-Added Telecommunications Services

 

Foreign investment in value-added telecommunications

 

Foreign direct investment in telecommunications companies in China is regulated by the Administrative Provisions on Foreign-Invested Telecommunications Enterprises, or the FITE Regulation, which was issued by the State Council on December 11, 2001, most recently amended on February 6, 2016. The FITE Regulation stipulates that a foreign-invested telecommunications enterprise in the PRC, or the FITE, must be established as a sino-foreign equity joint venture for operations in the PRC. Under the FITE Regulation and in accordance with WTO-related agreements, the foreign party investing in a FITE engaging in value-added telecommunications services may hold up to 50% of the ultimate equity interests of the FITE. In addition, the major foreign party as the shareholder of the FITE must satisfy a number of stringent performance and operational experience requirements, including demonstrating a good track record and experience in operating a value-added telecommunications business. The FITE that meets these requirements must obtain approvals from the Ministry of Industry and Information Technology, or the MIIT, and MOFCOM or their authorized local counterparts, which retain considerable discretion in granting approvals. Furthermore, the foreign party investing in the e-commerce business, as a type of value-added telecommunications services, has been allowed to hold up to 100% of the equity interests of the FITE based on the Circular of the Ministry of Industry and Information Technology on Removing the Restrictions on Shareholding Held by Foreign Investors in Online Data Processing and Transaction Processing (Operating E-commerce) Business issued on June 19, 2015, and the current effective Catalogue of Telecommunications Services, or the Telecom Catalog.

 

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On July 13, 2006, the Ministry of Information Industry of the PRC, or the MII (which is the predecessor of the MIIT) promulgated the Notice of the Ministry of Information Industry on Strengthening the Administration of Foreign Investment in Value-added Telecommunications Business, or the MII Notice, which reiterates certain requirements of the FITE Regulations and strengthens the administration by the MII. Under the MII Notice, if a foreign investor intends to invest in PRC value-added telecommunications business, the foreign investor must establish a FITE and apply for the relevant license for value-added telecommunications services, or the VATS License. In addition, a domestic company that holds a license for the provision of value-added telecommunications services is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors to conduct value-added telecommunications businesses illegally in China. Trademarks and domain names that are used in the provision of value-added telecommunications services must be owned by the license holder or its shareholders. The MII Notice also requires that each VATS License holder have appropriate facilities for its approved business operations and maintain such facilities in the business regions covered by its license. The VATS License holder shall perfect relevant measures for safeguarding the network and information, establish relevant administrative policies on information safety, set up the procedures for handling network emergencies and information safety and implement the liabilities system for information safety.

 

Telecommunications regulations

 

The Telecommunications Regulations of the PRC, or the Telecom Regulations, promulgated on September 25, 2000, and most recently amended on February 6, 2016, are the primary PRC laws governing telecommunications services, which set out the general framework for the provision of telecommunications services by domestic PRC companies. The Telecom Regulations require that telecommunications service providers shall obtain licenses prior to commencing operations. The Telecom Regulations distinguish basic telecommunications services and value-added telecommunications services. The Telecom Catalog, promulgated by MII on February 21, 2003, and amended by the MIIT on December 28, 2015, and June 6, 2019, and issued as an attachment to the Telecom Regulations, identifies internet information services and online data processing and transaction processing as value-added telecommunications services.

 

On July 3, 2017, the MIIT issued the revised Administrative Measures for the Licensing of Telecommunications Business, or the Telecom License Measures, which became effective on September 1, 2017, to supplement the Telecom Regulations. The Telecom License Measures require that an operator of value-added telecommunications services obtain a VATS License from the MIIT or its provincial-level counterparts. The term of a VATS License is five years and the license holder is subject to the annual inspection.

 

Internet information services

 

On September 25, 2000, the State Council promulgated the Measures for the Administration of Internet Information Services, or the ICP Measures, as amended on January 8, 2011. Under the ICP Measures, the internet information service is categorized into commercial internet information services and non-commercial internet services. The operators of non-commercial internet information services must file-record with relevant governmental authorities. However, the operators of commercial internet information services in China must obtain an ICP License, from the relevant governmental authorities. And the provision of particular information services, such as news, publishing, education, healthcare, medicine, and medical device must also comply with relevant laws and regulations and obtain approval from competent governmental authorities.

 

Internet information service providers are required to monitor their websites. They may not post or disseminate any content that falls within prohibited categories provided by laws or administrative regulations and must stop providing any such content on their websites. The PRC government may order ICP License holders that violate the content restrictions to correct those violations and revoke their ICP Licenses under serious conditions.

 

The MIIT released the Circular on Regulating the Use of Domain Names in Internet Information Services on November 27, 2017, effective from January 1, 2018, which provides that the domain names used by the internet information service provider in providing internet information services shall be registered and owned by such internet information service provider, and if the internet information service provider is a legal entity, the domain name registration shall be the legal entity (or any of its shareholders), or its principal or senior manager.

 

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Regulations Relating to Online Trading and E-Commerce

 

On January 26, 2014, the State Administration for Industry and Commerce, or the SAIC (which is the predecessor of the SAMR) promulgated the Administrative Measures for Online Trading, or the Online Trading Measures, which became effective on March 15, 2014, to regulate all operating activities for product sales and services provided via the internet (including mobile internet). It stipulates the obligations of online product operators and services providers and certain special requirements applicable to third-party platform operators. Furthermore, MOFCOM promulgated the Provisions on the Procedures for Formulating Transaction Rules of Third-Party Online Retail Platforms (Trial) on December 24, 2014, which became effective on April 1, 2015, to guide and regulate the formulation, revision and enforcement of transaction rules by online retail third-party platforms operators. These rules impose more stringent requirements and obligations on third-party platform operators. For example, third-party platform operators are obligated to make their transaction rules publicly available and file them with MOFCOM or their respective provincial counterparts, examine and register the legal status of each third-party merchant selling products or services on their platforms and display on a prominent location of the merchant’s webpage the information stated in the merchant’s business license or a link to its business license. Where third-party platform operators also conduct self-operation of products or services on the platform, these third-party platform operators must make a clear distinction between their online direct sales and sales of products by third-party merchants on their third-party platforms to avoid misleading the consumers.

 

On August 31, 2018, the Standing Committee of NPC promulgated the E-Commerce Law of the PRC, or the E-Commerce Law, which became effective on January 1, 2019. The promulgation of the E-Commerce Law established the basic legal framework for the development of China’s e-commerce business and clarified the obligations of the operators of e-commerce platforms and the possible legal consequences if operators of e-commerce platforms are found to violate legal obligations. For example, according to the E-Commerce Law, an operator of an e-commerce platform shall give appropriate reminders to and facilitate the business operators on its platform who have not completed the formalities for the registration of market entities to complete such formalities. Also, an operator of an e-commerce platform is legally obligated to verify and register the information of the business operators on its platform, prepare emergency plans in response to possible cyber security incidents, keep the transaction information for no less than three years from the date on which the transaction has been completed, establish rules on the protection of intellectual property rights and conform to the principle of openness, fairness, and justice. Violation of the provisions of the E-Commerce Law may result in being ordered to make corrections within a prescribed period, confiscation of illegally obtained gains, fines, suspension of business, the inclusion of such violations in the credit records and possible civil liabilities.

 

Regulations Relating to Land Use Right and Construction

 

Pursuant to the PRC Land Administration Law promulgated in June 1986 with the latest amendment in August 2019 (effective as of January 2020) and the PRC Civil Code, any entity that needs land for construction must obtain land use right and must register with local counterparts of Ministry of Natural Resources. Land use right is established at the time of registration.

 

According to the Measures for the Administration of Grant and Transfer of Right to Use Urban State-owned Land promulgated by the Ministry of Construction in December 1992 with the latest amendment in 2011, and the PRC Law on Urban and Rural Planning promulgated by the Standing Committee of the National People’s Congress in October 2007 and became effective in January 2008 with the latest amendment in April 2019, the Measures for Administration of Granting Permission for Commencement of Construction Works promulgated by the Ministry of Housing and Urban-Rural Development of the PRC (MOHURD) in June 2014 with the latest amendment in September 2018, and the Administrative Measures on the Filings of Inspection Upon Completion of Construction of Buildings and Municipal Infrastructure promulgated by the MOHURD in October 2009, after obtaining land use right, the owner of land use right must obtain construction land planning permit, construction works planning permit from the relevant municipal planning authority, and a construction permit from relevant construction authority in order to commence construction. After a building is completed, an examination of completion by the relevant governmental authorities and experts must be organized.

 

Regulations on Production and Sale of Food Products

 

Before 2018, the China Food and Drug Administration, or the CFDA, had the regulatory authority to oversee, administer, and enforce all laws, regulations, and rules concerning the food industry business operations in China. After the institutions reformed, the CFDA has been abolished, and relevant regulatory authority has been taken over by the SAMR under the State Council.

 

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The food industry is subject to extensive regulations in China. The PRC laws and regulations governing the food industry primarily consist of the PRC Food Safety Law (2009), as last amended in 2018; the Implementation Regulation for the Food Safety Law of PRC (2009), as amended in 2019, or the Food Safety Regulation; the Administrative Measures for Food Production Licensing (2020), or the Food Production Licensing Rule; and the Administrative Measures for Food Business Licensing (2015), as amended in 2017, or the Food Business Licensing Rule. Under the PRC Food Safety Law and the Food Safety Regulation, food product manufacturers and business operators shall obtain the required food production permits; food producers and business operators are subject to regular quality inspection and supervision by the local governmental agencies and their product permits may be revoked if they no longer meet the standards and requirements for food production and operation; food-producing enterprises shall establish and implement food safety management systems, such as ingredient inspection and acceptance, production process safety management, storage management, equipment management, and substandard product management systems; and packaging of pre-packed food shall bear a label which states manufacturing permit serial number; among other things. The State Council implements a licensing system for food product manufacture and distribution. According to the Food Production Licensing Rule, a food production license must be obtained prior to engaging in food production activities in the PRC. The Food Business Licensing Rule requires food business operators to obtain a food business license for each business entity engaging in food business operations. We have obtained the required Food Production Licenses and Food Business Licenses, as set forth in the table below:

 

No   License Type   License No.   License  Date   Expiry Date Holder
1   Food Production License   SC12361052300601   April 4, 2019   June 11, 2021 Xi’an App-Chem
                   
2   Food Business License   JY16101130096276   November 10, 2017   November 9, 2022 Xi’an App-Chem
                   
3   Food Production License   SC10661020100062   September 2, 2019   November 27,2022 Tongchuan DT

 

In addition to PRC laws and regulations, we strictly follow applicable safety regulations in all markets to which we sell our products. Through our VIE, Xi’an App-Chem, we have obtained REACH certification for our ambroxide in the European Union, and Generally Recognized as Safe List (“GRAS”) certification from the FDA for our clary sage. We have obtained kosher and halal certifications for certain of our products as well.

 

“GRAS” is an acronym for the phrase Generally Recognized ASafe. Under sections 201(s) and 409 of the U.S. Federal Food, Drug, and Cosmetic Act (the “Act”), any substance that is intentionally added to food is a food additive, that is subject to premarket review and approval by FDA, unless the substance is generally recognized, among qualified experts, as having been adequately shown to be safe under the conditions of its intended use, or unless the use of the substance is otherwise excepted from the definition of a food additive. General recognition of safety under for a substance under U.S. law may be achieved under either of two methods:

 

Under sections 201(s) and 409 of the Act, and FDA’s implementing regulations in 21 CFR 170.3 and 21 CFR 170.30, the use of a food substance may be GRAS either through scientific procedures or, for a substance used in food before 1958, through experience based on common use in food Under 21 CFR 170.30(b), general recognition of safety through scientific procedures requires the same quantity and quality of scientific evidence as is required to obtain approval of the substance as a food additive. General recognition of safety through scientific procedures is based upon the application of generally available and accepted scientific data, information, or methods, which ordinarily are published, as well as the application of scientific principles, and may be corroborated by the application of unpublished scientific data, information, or methods.

 

Under 21 CFR 170.30(c) and 170.3(f), general recognition of safety through experience based on common use in foods requires a substantial history of consumption for food use by a significant number of consumers.

 

Under 21 CFR 182.20, clary sage has been generally recognized as safe for its intended use.

 

REACH stands for “Registration, Evaluation, Authorization and Restriction of Chemicals”. REACH is the EU’s regulation on preventive management of all chemicals entering its market. The regulation was issued on June 1, 2007, and implemented on June 1, 2008. According to the EU REACH regulations, companies need to submit a registration to the European Chemicals Agency (ECHA) for chemical substances (substances, substances in mixtures or substances intentionally released in articles) whose annual output or import volume exceeds 1 ton in the EU in order to continue to manufacture, import or sell the chemical within the EU. Xi’an App-Chem, sells two non-food products – sclareol glycol and ambroxide – in the EU. Both of these products have EU REACH certification, which satisfies the EU safety regulations for export and allows them to be sold in compliance with the EU market rules.

 

We rely upon published and unpublished safety information including clinical studies on ingredients used in our products. These studies include the following:

 

“Safety and toxicity of silymarin, the major constituent of milk thistle extract: An updated review,” (a study on the use of Silymarin in humans at therapeutic doses of up to 700 mg three times a day for 24 weeks.) Some gastrointestinal discomforts occurred like nausea and diarrhea.

 

The toxicology and safety of apple polyphenol extract,” (a study on polyphenol use in humans that includ