10-K 1 v204827_10k.htm Unassociated Document


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

FORM 10-K
 
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECT ION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2010
Or
 
  
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to
 
Commission file number: 001-34484
 

 
(Exact Name of Registrant as Specified in Its Charter)
 
Nevada
33-0215298
(State or other jurisdiction of incorporation or
(I.R.S. Employer
organization)
Identification No.)
 
Winner Industrial Park, Bulong Road
Longhua, Shenzhen City, 518109
People’s Republic of China
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (86) 755-28138888
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.001 par value
 
Nasdaq Global Market
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes  x No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ Yes  x No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ¨ No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨ Yes   x  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a small reporting company. See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
 
Accelerated filer ¨
Non-accelerated filer ¨
Small reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).   ¨  Yes    x   No
 
At March 31, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $30,465,948, based on the last sale price of the registrant’s common stock. For the purposes of the foregoing calculation only, all of the registrant’s directors, executive officers and holders of ten percent or greater of the registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates* computed by reference to the price of $4.82 per share of common stock at which the common equity was last sold on September 30, 2010, the last day of our most recently completed fourth fiscal quarter was $28,623,454.
 
* Excludes 18,012,264 shares of common stock held by executive officers, directors and stockholders whose individual ownership exceeds 10% of common stock outstanding on September 30, 2010.
 
As of December 8, 2010, there were 24,130,247 shares of the registrant’s common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
None.

 

 

WINNER MEDICAL GROUP INC.
 
FORM 10-K
For the Fiscal Year Ended September 30, 2010

Number
     
Page
   
PART I
   
         
 
Description of Business
 
4
 
Risk Factors
 
16
 
Unresolved Staff Comments
 
24 
Item 2.
 
Properties
 
24 
 
Legal Proceedings
 
26 
 
Submission of Matters to a Vote of Security Holders
 
26 
         
   
PART II
   
         
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
27 
Item 6.
 
Selected Financial Data
 
28 
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
30 
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
 
42 
Item 8.
 
Financial Statements and Supplementary Data
 
42 
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
43 
Item 9A.
 
Controls and Procedures
 
43 
Item 9B.
 
Other Information
 
43 
       
 
   
PART III
   
         
Item 10.
 
Directors and Executive Officers of the Registrant
 
44 
Item 11.
 
Executive Compensation
 
46 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management
 
52 
Item 13.
 
Certain Relationships and Related Transactions
 
53 
Item 14.
 
Principal Accountant Fees and Services
 
53 
       
 
   
PART IV
   
         
Item 15.
 
Exhibits and Financial Statement Schedules
 
55 

 
2

 
 
Use of Terms

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

Forward-Looking Statement

Statements contained in this Annual Report on Form 10-K include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “should,” “project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” “potential,” “opportunity” or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. Potential risks and uncertainties include, among other things, such factors as:
 
 
·
the Company’s dependence upon international customers;
 
·
international trade restrictions;
 
·
foreign currency fluctuation;
 
·
developments in the healthcare industry;
 
·
the Company’s dependence on patent and trade secret laws;
 
·
a high percentage of the Company’s revenues is from a single customer;
 
·
uncertainties with respect to the PRC legal and regulatory environments;
 
·
the Company’s ability to adequately finance the significant costs associated with the development of new medical products;
 
·
potential product liability claims for which the Company does not have insurance coverage;
 
·
other risks identified in this Report and the Company other filings with the SEC;
 
·
the effects of the global economic situation;
 
·
escalating pricing pressures from the Company’s customers;
 
·
the Company’s ability to accurately project market demand for its products;
 
·
risks associated with future investments or acquisitions;
 
·
interruption in the Company’s production processes;
 
·
the Company’s ability to attract new customers;
 
·
the Company’s ability to employ and retain qualified employees;
 
·
competition and competitive factors in the markets in which the Company competes;
 
·
general economic and business conditions in China and in the local economies in which the Company regularly conducts business, which can affect demand for the Company’s products and services;
 
·
changes in laws, rules and regulations governing the business community in China in general, and the healthcare industry in particular; and
 
·
the risks identified in Item 1A. “Risk Factors” included herein.

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

 
3

 

PART I

Item 1. Description of Business

History
 
The Company was originally incorporated under the name Birch Enterprises, Inc. in the state of Nevada in August 1986. On September 14, 1987, the Company consummated a business combination transaction with Las Vegas Resort Investments, whereby Las Vegas Resort Investments became the Company’s wholly-owned subsidiary. Concurrent with this transaction, the Company changed its corporate name to Las Vegas Resorts Corporation. During September 1992 all of the Company’s operations ceased. The Company had no active operations from then until December 16, 2005, when it completed a reverse acquisition transaction with Winner Group Limited, a Cayman Islands corporation, whose subsidiary companies originally commenced business in February 1991. On December 16, 2005, the Company completed a reverse acquisition transaction with Winner Group Limited whereby the Company issued to the stockholders of Winner Group Limited 42,280,840 shares of its common stock in exchange for all 1,143,000 shares of the issued and outstanding capital stock of Winner Group Limited. These 42,280,840 shares had been restated to 21,140,420 shares in the Company’s financial statements to reflect a reverse stock split of 1 new share of common stock for 2 old shares of common stock on October 6, 2009. Upon effectiveness of the reverse stock split, the outstanding and issued shares were approximately 22,363,740 shares, after rounding up fractional shares. Winner Group Limited thereby became the Company’s wholly-owned subsidiary and the former stockholders of Winner Group Limited became the Company’s controlling stockholders. On February 13, 2006, the Company amended its Articles of Incorporation to change its name from Las Vegas Resorts Corporation to Winner Medical Group Inc. The Company changed its name to reflect its new business and to accord with the names of its subsidiary companies.
 
For accounting purposes, the share exchange transaction was treated as a reverse acquisition with Winner Group Limited as the acquirer and Winner Medical Group Inc. as the acquired party. When the Company refers in this prospectus to business and financial information for periods prior to the consummation of the reverse acquisition, the Company is referring to the business and financial information of Winner Group Limited on a consolidated basis unless the context suggests otherwise.
 
Winner Group Limited’s operations began with Winner Medical & Textile Ltd. Zhuhai, which was incorporated in China in February 1991 by the Company’s CEO, President and director, Mr. Jianquan Li, and was deregistered in fiscal year 2009. Winner Group Limited was incorporated as a Limited Liability Exempted Company in the Cayman Islands in April 2003, and is the holding company of all of the Company’s business operations. Below is the Company’s holding company structure as of the date of this Report.

 
4

 


*On September 13, 2010, Winner Industries (Shenzhen) Co., Ltd. purchased 40% of the equity interest representing the total interest held by the non-controlling shareholder, Shanghai Winner Medical Apparatus Co., Ltd. Following the purchase, Shanghai Winner Medical Apparatus Co., Ltd. became a wholly-owned subsidiary of the Company.
 
Business

Winner Medical’s business operations consist of the manufacturing and marketing, researching and developing of cotton-base medical dressings and medical disposables, as well as consumer products. The Company has ten wholly-owned operating subsidiaries and three joint ventures, all located in China. The Company has established several integrated manufacturing and processing lines for its core products. The Company’s product offerings include medical dressings and medical disposables, which consist of medical care and wound care, as well as PurCotton products, which are produced from a spunlace, natural cotton nonwoven material. The Company manufactures its products in China and sells its medical dressings and medical disposables both in China and abroad, with Europe, the United States and Japan serving as the top three markets. The Company also sells its PurCotton® jumbo rolls in both China and abroad, and PurCotton® finished consumer products mainly in China.

 
5

 

Business Strategy

The Company’s primary business strategy is to achieve annual growth in revenue by building its brand and reputation. The Company seeks to implement its business strategy by focusing on:
 
Ÿ
Marketing Its Own Winner® Medical Branded Products in China. The surgical dressings and medical disposables market in China is expanding quickly. The Company believes that the demand for medical dressing and disposable products in China will experience rapid growth in the future as the Chinese government reforms the medical care system. The Company believes that these factors will create opportunities for companies, such as Winner Medical, that already follow such strict conduct and quality control regulations.

During the fiscal year ended September 30, 2010, approximately 19.39% of the Company’s sales revenue was generated in China, which includes medical sales and PurCotton® product sales in China, and this percentage the Company believes will increase. The Company’s medical sales channels in China include: hospitals, local distributors and chain drugstores.
 
Ÿ
Marketing and Expanding PurCotton® Consumer Products. The PurCotton, spunlace, cotton nonwoven products are expected to have advantages over woven cotton or synthetic nonwoven fabric, as they are natural, safe, strong, durable, healthy, eco-friendly and of high quality. The Company intends to utilize its patented, spunlace manufacturing process which forms raw cotton into nonwoven cotton fabric to produce PurCotton® products at a lower cost than woven cotton products, which it believes will provide a significant advantage. Patent applications covering the invention of the spunlace method for forming raw cotton into nonwoven process have been made in more than 50 countries and regions. Patents have been granted in China, the United States, Russia, Singapore, South Africa, Mexico, Nigeria, Canada, Egypt, Vietnam, the Philippines, and member states of the European Patent Office.

In order to build and market the PurCotton® brand in China, the Company’s subsidiary in Shenzhen, set up a wholly-owned subsidiary, Shenzhen PurCotton Technology Co., Ltd. (“Shenzhen PurCotton”), which aims at selling PurCotton® branded products by its own marketing and sales efforts in the China marketplace. The Company is expected to diversify its sales channels and product categories in the future. The main distribution channels consist of chain stores (PurCotton® stores), on-line sales and wholesale to large customers.
 
During the fiscal year ended September 30, 2010 and 2009, sales revenue from PurCotton® products, which includes PurCotton wholesale and retail sales both in China and abroad, reached approximately $10,128,000, or 8.80% of total sales revenue, and $5,468,000, or 5.56 % of total sales revenue, respectively.
 
Ÿ
Focus on higher margin products. Regarding its long term plan, the Company is executing a systematic plan for the marketing and sale of higher margin products in terms of higher value-added medical dressing products and PurCotton® consumer products. Even though it experienced low margins during the initial stage of the PurCotton® products launch, the Company believes it will generate a higher margin once PurCotton® products are well accepted by its retail customers. At the same time, the Company is working on technical improvements to its equipment at Winner Huanggang to increase production efficiency and capacity.

Ÿ
Providing High Quality Products. The Company’s goal is to manufacture and sell products that are of the high quality in the industry and in accordance with established industry standards. The Company maintains strict and comprehensive quality assurance and quality control system. The Company has already established three quality management systems: ISO9001:2000 quality management system, ISO13485:2003 medical devices quality control system and 21CFR Part 820, Medical Device Quality System Regulation. Currently, most of the Company’s products have obtained European Union CE Certificates. The remaining of the Company’s products are not required to obtain European Union CE certificates because these products are neither medical related products nor sold in international marketplace. The Company’s products imported into the United States are registered with the U.S. Food and Drug Administration, “FDA”. The Company has 47 types of products listed with the FDA, and it is proud to have FDA clearance to import sterilized products into the United States. Among those products are sterilization pouches and face masks, for which 510(k) premarket notifications were filed and which have received orders of substantial equivalence from the FDA. Japanese certificates, which are awarded to individual factories, have been granted to Winner Medical’s Shenzhen, Jiayu, and Chongyang factories, which are all qualified and entitled to export products directly to Japan.

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

 
6

 

Ÿ
Providing Customers with a Complete Product Line – One Stop Procurement Services. The Company provides customers with specialized medical dressing products that are intended to address a number of customer issues and needs. The Company’s products are designed to meet a wide variety of its clients’ product configuration demands. The Company uses manufacturing equipment, including gauze sponge bleaching equipment, sterile packaging machines, auto-gauze sponges folding machines, nonwoven sponge folding machines and steam sterilization and ethylene oxide, “ETO,” for sterilization processing which it believes allows the Company to produce its products in a cost efficient manner.

Ÿ
Developing Products Through Research and Development. The Company’s research and development efforts are aimed at finding new varieties of products, improving existing products and product quality and reducing production costs. The Company intends to focus significant efforts on opening new opportunities for its new products.

Ÿ
Implementing Advanced Information Technology Systems. The Company has implemented the Enterprise Resources Planning, “ERP,” software provided by a Systems Applications and Products company, “SAP,” or “SAP ERP” system, which integrates all of the core business operations of each of its subsidiaries, such as purchasing, manufacturing, selling, expenses, financing, human resources and retailing, and records them on one system. The Company’s goal is to build a platform on which the Company can share information with its customers, including raw material preparation, production status, inventory and transportation.

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

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

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

Products
 
In fiscal year 2010, the Company’s operations were conducted in two operating segments, which are medical dressings and medical disposables, and spunlace 100% PurCotton® nonwoven consumer products. The Company’s operating decisions, on-site management, internal reporting and performance assessments are conducted within each of these two identified segments:

Medical dressings and medical disposables, which have two categories according to their functions:

Medical care products
Include operating room products, procedural packs, protective products and gauze.
Surgical Grape
Gown
Face Mask
Surgical Dressing Pack
Sponge, including Gauze Sponge, Lap Sponge
Sterilization Pouch
Gauze Ball
Fluff Roll
Gauze Roll
Swab

Wound care products
Include dressing pads, cotton products, retention products and dental products.
First Aid
Tape
Adhesive Wound Dressing
Cotton Ball
Bandages, including elastic, gauze and cohesive flexible

 
7

 

Consumer products

PurCotton is a type of cotton product that is made of 100% natural cotton using spunlace nonwoven technology. Its products include jumbo rolls as raw materials and finished consumer products. Its consumer products include:
Cotton Wipes
Cotton Wet Wipes
Cosmetic Pad
Sanitary Napkin
Gauze Baby Wear
Gauze Baby Towel
Baby Reusable Diaper
Handkerchiefs
Q-tips
Face Mask
Sport Bandage
 

Sales, Marketing and Customers
 
The Company’s medical dressing and disposable products are sold internationally through a network of distributors, wholesalers and manufacturers’ representatives as original equipment manufacturer (“OEM”) products. The Company’s major target markets are Japan, Europe and North and South America. In light of its existing production capacity constraints, the Company expands its sales to the Chinese market and developing countries through local distributors into hospitals, chain drug stores and direct to hospitals under its own brand name, “Winner®.” The Company plans to sell its PurCotton® consumer products in the Chinese market through chain stores and Business-to-Customer (B2C) online sales, and distributors under its own brand “PurCotton.” The Company defines PurCotton as its product name, patent application name, trademark and chain store English name.

Since there are different requirements for different products and in different geographic markets, the Company has adopted marketing strategies that are market specific. For developed markets such as the United States, Japan and the European Union, the Company offers OEM products under private label programs to supply medical suppliers. This approach enables the Company to capitalize on its customers’ branding strengths and established market channels. In order to gain more market share, the Company attempts to leverage its customers’ strong brand names, efficient distribution networks and market presence. The Company believes it is a better strategy to team up with large, well-known companies than to compete directly with them. Most of the Company’s sales in developed countries are conducted by direct marketing. In addition, the Company also conducts sales through third-party manufacturers’ representatives, who are compensated through payment of sales commissions.

In China and other developing countries, the Company sells its medical dressing and disposable products under the “Winner®” brand name. As the economies of China and other developing countries grow, the Company expects that there will be a significant increase in demand for medical products, including demand for the Company’s medical dressings and other medical disposable products. The Company believes its products are generally price-competitive with products from the United States, Japan and the European countries. Competition can also come from local producers in the developing countries, but the Company attempts to compete with local manufacturers based on the quality of its products. The Company employs manufacturers’ representatives and actively participates in formal bid contracts organized by local governments and organizations. Its regional distributors typically attempt to build and maintain direct contact with medical purchasers in hospitals. The Company is developing a distribution network to capture opportunities in China, mainly through local distributors, drugstore chains and direct sales to hospitals. In order to better develop its market, the Company officers are put in charge of communicating with local distributors in some major cities, such as Guangzhou, Fuzhou, Chengdu, Chongqing, Wuhan, Fuzhou, Shanghai, Beijing and Shenyang. The Company also directly sells to hospitals in Hong Kong.

The Company believes that its material and manufacturing processes produce PurCotton® products that are healthy, soft, comfortable and environmentally-friendly. In August 2009, the Company started selling its jumbo rolls to manufacturers in China and Japan who produce consumer products. The Company believes that, as living standards improve and environmental protection awareness grows in China, people will desire products that are healthy, soft, comfortable and have less carbon emission. In order to launch this product and promote the PurCotton brand, the Company sells its consumer products mainly through chain stores, business-to-customer online sales, “B2C,” and distributors in the Chinese market. On December 31, 2009, the first chain store was opened in Shenzhen, China. As of December 8, 2010, the Company has opened 23 chain stores in Guangdong province, which are mainly located in shopping malls. In order to broaden its customer base, in July 2010, it opened its B2C website at Taobao.com http://purcotton.mall.taobao.com/ on a trial basis and launched its own B2C website www.purcotton.com in September 2010.

The Company has customers in approximately 80 countries throughout the world, including Japan, Germany, the United States, Italy, the Netherlands, the United Kingdom, Australia, France and China, as well as countries in South America, Africa and the Middle East. For its medical dressings and medical disposables business, some of the Company’s customers are large-scale producers and distributors with well-known brand names, while others are import and export firms or wholesalers with trade expertise and established sales channels. For its consumer products business, it targets mid-to high-end female consumers who are 25-45 years old, and families who prefer to buy premium products.

 
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Sakai Shoten Co., Ltd and Tyco Healthcare Co., Ltd accounted for more than 10% of the Company’s revenues in fiscal year 2010. Sakai Shoten Co., Ltd. accounted for approximately 12.16% and 14.78% of the Company’s revenue in fiscal years 2010 and 2009, respectively. Sakai Shoten Co., Ltd. acts as a purchasing agent for a large number of ultimate consumers of the Company’s products in Japan. Tyco Healthcare Co., Ltd accounted for 10.09% and 9.91% of the Company’s revenue in fiscal years 2010 and 2009, respectively. If the Company loses these customers without replacing them with other customers that purchase a similar amount of its products, the Company’s revenues and net income may decline considerably.

Raw Materials and Manufacturing
 
In fiscal year 2010, the Company depends on external suppliers to supply raw materials to produce its products. The principal raw materials used for the Company’s products are cotton, non-woven cloth and packaging materials, each of which it purchases from a limited number of suppliers. In the past, the Company has not experienced a problem in securing raw materials. Its principal cotton raw material is produced mainly in China. The Company’s major suppliers of packaging materials and cotton are Safe Secure Packing (Shenzhen) Co., Ltd and China National Cotton Reserves Corporation. The Company’s purchases from any one individual supplier were less than 5% of its total purchase amount in fiscal year 2010. The Company believes it is not over reliant on any of these suppliers.

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

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

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

The Company’s production is vertically integrated, from raw material processing to semi finished products to finished products, which is able to control the entire manufacturing processes to maintain product quality. The Company has eight wholly owned manufacturing plants which are majorly located in Hubei province and to a lesser extent in other parts of China, which are:

Ÿ
Winner Industries (Shenzhen) Co., Ltd. is a final procedure packaging center, sterilize center and a logistics center of the Company, and is located at Winner Industrial Park, Bulong Road, Longhua, Shenzhen City, China.
Ÿ
Winner Medical (Huanggang) Co., Ltd. produces PurCotton jumbo roll and PurCotton relative products, and is located at Pearl Avenue, Huanggang High-Tech Park, Huanggang City, Hubei Province, China.
Ÿ
Hubei Winner Textile Co., Ltd. produces gauze, swabs and cotton filled sponges, etc., and is located at No. 47 South Road of Jianshe, Yuekou Town of Tianmen City, Hubei Province.
Ÿ
Winner Medical & Textile Ltd. Jiayu is in charge of producing cast padding, cotton swab, cotton ball, ABD pad, dental roll, zig-zag cotton and cotton pound roll, etc., and is located at No. 172 Phoenix Avenue, Yuyue Town, Jiayu County, Hubei Province.
Ÿ
Winner Medical & Textile Ltd. Jingmen mainly manufactures lap sponges, gauze bandage, fluff roll and baby wear, and is located at Te 1 Hangkong Road, Pailou Town, Jingmen City, Hubei Province.
Ÿ
Winner Medical & Textile Ltd. Yichang weaves gauze and supplies gauze to the Companies other factories, and is located at No. 20 Jiangxia Avenue, Jiangkou Town, Zhijiang City, Hubei Province.
Ÿ
Winner Medical & Textile Ltd. Chongyang weaves and produces gauze sponge, gauze roll and gauze ball, and is located at Qingshan Park, Chongyang County, Hubei Province.

 
9

 

Ÿ
Shanghai Winner Medical Apparatus Co., Ltd. produces self-adhesive and adhesive bandages, and is located at 98 Jiechen Road, Songjiang District, Shanghai.

To execute its PurCotton business, the Company entered into an agreement in 2005 with the local government agency of Huanggang to acquire 564,742 square meters of land, approximately 140 acres, that will mostly be dedicated to the construction of production facilities for 100% cotton spunlace nonwoven fabric in the Company’s subsidiary Winner Medical (Huanggang) Co., Ltd., “Winner Huanggang.” Land use right certificates were issued to the Company in November 2005 and July 2007. As of September 30, 2010, the first two PurCotton manufacturing lines are producing at full capacity, with a total production capacity of 200 tons per month. The third and fourth manufacturing lines have also started production. The total projected capacity for these two lines will be 230 tons per month. Products from these lines are sold mainly to the Japanese market, and have a higher gram weight per square meter than those products made by the first two lines. As of December 8, 2010, these two lines were operating at 40% capacity, as they are still in the initial start-up stage and the anticipated level of orders has not yet been reached. The Company expects that these two lines will be at full capacity by the end of 2011.

Competition
 
The Company is subject to intense competition. Some of the Company’s competitors have greater financial resources, better marketing approaches and more established market recognition than the Company does in the domestic Chinese and international markets. Increased competition in the medical dressings and disposables could put pressure on the price at which the Company sells its products, resulting in reduced profitability for the Company. In the Company’s industry, the Company competes based on manufacturing capacity, product quality, product cost, ability to produce a diverse range of products and logistics capabilities.

For the international sales of medical dressings and medical disposables competitors, the Company views the below companies as its most significant competitors in the major markets in which it sells its products:

 
Ÿ
Competitors based in China. For overseas market, the Company’s competitors based in China primarily include: Shenzhen Aumei, Zhejiang Zhende Medical Dressing Co., Ltd., Jiangsu Province Jianerkang Medical Dressing Co., Ltd., and Qingdao Hartmann Medical Dressing Co., Ltd. These competitors tend to have lower labor costs, and the Company believes that their products are of lower quality and often lack diversity, and these competitors are not as strong in brand building and management.

 
Ÿ
Competitors based in Asia (Outside of China). Competitors based in this area mainly come from India and countries in Southeast Asia, such as Premier Enterprise and Sri Ram Products, whose main business is weaving. These competitors lack interconnected businesses and suppliers within the local industry; and tend to be understaffed and have a lower quality of management, as well as a lower product quality.

 
Ÿ
Competitors based in Europe and North America. Competitors based in Europe and North America include: Bastos Viegas, S.A. (Portugal), Intergaz, S.R.O. (Czech Republic), and TZMO S.A. (Poland). The Company’s competitors from Europe may have a geographic advantage in the European Union market, but the Company believes they have less product diversity and higher production costs.

For Chinese domestic sales, the Company’s core competitor is Henan Piao’an Group Co., Ltd., which tends to maintain stronger relationship with hospitals since its main operations are based in China and its operation is larger in the Chinese market. However, the Company’s quality control system and sterilize technology tend to be better accepted by hospitals.

For the PurCotton business, the Company believes that its material and manufacturing processes produce products that are healthy, soft, comfortable and environmentally-friendly. The Company targets mid- to high-end female consumers and families with babies who are concerned about their skin and health and would prefer to buy premium products. However, the PurCotton retail business is new to the market, and the Company has to spend a significant amount of time and effort cultivating its customers. Furthermore, the Company believes PurCotton raw material could replace medical gauze and medical synthetic nonwoven products. However, due to the need for clinical examinations and certificate approvals, the Company projects that it will take time to secure product acceptance from hospitals.

 
10

 

Competitive Advantages
 
The Company’s customers in the medical industry employ high quality standards, since product quality and safety are their primary consideration. They perform strict factory and production system verification and product quality testing on their target suppliers. Once a supplier passes these tests, it is costly to switch to another. Compared with its competitors, the Company’s competitive advantages include the following:
 
Ÿ
Sound quality management system and certificates obtained. The Company has already established three quality management systems: ISO9001:2000 quality management system, ISO13485:2003 medical devices quality control system and 21CFR Part 820, Medical Device Quality System Regulation. Currently, most of the Company’s products have obtained European Union CE Certificates. The remaining of the Company’s products are not required to obtain European Union CE certificates because these products are neither medical related products nor sold in international marketplace. The Company’s products imported into the United States are registered with the FDA. The Company has 47 types of products listed with the FDA, and it is proud to have FDA clearance to import sterilized products into the United States. Among those products are sterilization pouches and face masks, for which 510(k) premarket notifications were filed and which have received orders of substantial equivalence from the FDA. Japanese certificates, which are awarded to individual factories, have been granted to Winner Medical’s Shenzhen, Jiayu, and Chongyang factories, which are all qualified and entitled to export products directly to Japan.

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

Ÿ
Innovation. The Company is dedicated to invest in research and development to drive innovation. The Company concentrates on innovation in value-added features for its medical dressings and medical disposables. It also focuses on the PurCotton manufacturing process to improve product quality and enhance efficiency, and continues to expand its PurCotton production line through line extensions and value-added features. The Company has already obtained invention patents in China, the United States, Russia, Singapore, South Africa, Mexico, Nigeria, the Philippines and member states of the European Patent Office for the invention of 100% spunlace cotton nonwoven manufacture process.

Intellectual Property

The Company currently has thirty eight issued patents. Below are brief descriptions of these patents:

Description of Patent
  
Patent No.
  
Type
 
Status
             
Manufacturing method for the spunlace non-woven cloth with X-ray detectable element thereby produced
 
ZL 200510033576.9 (China)
 
Invention
 
Granted
             
Manufacture method of the 100% cotton non-woven medical dressings
 
ZL 200510033147.1 (China)
 
Invention
 
Granted
             
Colored non-woven cloth with special coat
 
ZL 200620013847.4 (China)
 
Utility Model
 
Granted
             
Colored 100% cotton gauze
 
ZL 200620132922.9 (China)
 
Utility Model
 
Granted
             
100% cotton gauze with protective function
 
ZL 200620132920.X (China)
 
Utility Model
 
Granted
             
A medical dressing resists penetration and adhesion
 
ZL 200620132921.4 (China)
 
Utility Model
 
Granted
             
An ancillary fight code machine
 
ZL 200620017009.4 (China)
 
Utility Model
 
Granted
             
A safety medical gauze with detective device
 
ZL 200620014971.2 (China)
 
Utility Model
 
Granted
             
Wipes box
 
ZL 200630060318.5 (China)
 
Appearance design
 
Granted
             
Spunlace non-woven cloth with special coat and protective function
 
ZL 200620013845.5 (China)
 
Utility Model
 
Granted
             
A testing equipment for cloth
 
ZL 200820091990.4 (China)
 
Utility Model
 
Granted
             
Wound dressing
 
ZL 200820092733.2 (China)
 
Utility Model
 
Granted
             
Petrolatum dressing
 
ZL 200820105164.0 (China)
 
Utility Model
 
Granted

 
11

 
 
Description of Patent
  
Patent No.
  
Type
 
Status
             
Product of and Method for hydrophobic 100% cotton non-woven cloth
 
ZL 200820093952.2 (China)
 
Utility Model
 
Granted
             
Packing device for medical dressing products
 
ZL 200820094531.1 (China)
 
Utility Model
 
Granted
             
Draw out wipes box
 
ZL 200520035670.3 (China)
 
Utility Model
 
Granted
             
Medical product box
 
ZL 200820207244.7 (China)
 
Utility Model
 
Granted
             
Embossed non-woven cloth
 
ZL 2008201397530 (China)
 
Utility Model
 
Granted
             
A care package
 
ZL 200820235800.1 (China)
 
Utility Model
 
Granted
             
A bondage
 
ZL 200920129524.5 (China)
 
Utility Model
 
Granted
             
A protective facemask
 
ZL 200920135220.X (China)
 
Utility Model
 
Granted
             
A spunlace non-woven and its devices
 
ZL 200920131414.2 (China)
 
Utility Model
 
Granted
             
A kind of medical dressing
 
ZL 200920132228.0 (China)
 
Utility Model
 
Granted
             
A multi-material lab sponge and operating sheet
 
ZL 200920134448.7 (China)
 
Utility Model
 
Granted
             
Sanitary napkin #326
 
ZL 201030227804.8 (China)
 
Appearance design
 
Granted
             
A medical and hygiene device with pure cotton spunlace surface
 
ZL 200920260990.7 (China)
 
Utility Model
 
Granted
             
A breathable pure cotton medical protective cloth
 
ZL 201020153332.0 (China)
 
Utility Model
 
Granted
             
Pure cotton layer sanitary napkin and pure cotton layer disposable underpants
 
ZL 201020186577.3 (China)
 
Utility Model
 
Granted
             
A safety X-ray detectable medical dressing
 
ZL 200510033022.9 (China)
 
 Invention
 
Granted
             
A safety medical operating gauze
 
ZL 200610062853.3 (China)
 
 Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
05013515.1 (E.U.)
 
Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
1-2007-501648 (Philippines)
 
Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
270370 (Mexico)
 
Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
2007/7583 (South Africa)
 
Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
NG/C/2007/774 (Nigeria)
 
Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
2, 510, 995 (Canada)
 
Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
24725 (Egypt)
 
Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
1-2007-01745 (Vietnam)
 
Invention
 
Granted

 
12

 

The Company has licensed from Jianquan Li, the Company’s CEO, President and Director, his rights to four patent and related technologies grants for nonwoven fabric manufacturing on a perpetual, worldwide royalty-free basis. Below are the brief descriptions of these patents:

Description of Patent licensed from Jianquan Li
 
Patent No.
 
Type
 
Status
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
US 7049753 B2 (U.S.)
 
Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
2326191 (Russia)
 
 
Invention
 
Granted
             
Method for producing spunlace non-woven cloth, method for producing spunlace non-woven cloth with X-ray detectable element, spunlace non-woven cloth with X-ray detectable element produced thereby
 
P-No. 125160 (Singapore)
 
Invention
 
Granted
             
Spunlace non-woven cloth with X-ray detectable element
 
ZL 200520055659.3 (China)
 
Utility Model
 
Granted

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

In addition, the Company has registered thirty six domain names, including www.winnermedical.com, www.purcotton.com,  www.purcotton.cn, www.purcotton.net , www.softtouch.hk (currently in use), www.winner-industries.com,www.winner-beijing.com,www.winner-shanghai.com, www.winner-shenzhen.com, www.purcotton.hk, www.purcotton.asia, www.purcotton.net.cn,www.purcotton.com.cn,www.winnermedical.name,www.winnermedical.info, www.winnermedical.hk, www.winnermedical.net.cn, www.winnermedical.cn, www.winnermedical.net, www.winnermedical.org and www.winnermedical.mobi, etc.
 
Where appropriate for the Company’s business strategy, the Company will continue to take steps to protect its intellectual property rights.

Research and Development Efforts

The Company spent approximately $1,767,000 and $1,663,000 on research and development in fiscal years 2010 and 2009, respectively.
 
The Company’s research and development in 2010 was mainly focused on developing new finished PurCotton® products for consumer use to broaden and diversify its product types to support its chain store sale and online sale, and researching new coating technology for PurCotton® medical products. Such coating technology will be applied on the production of PurCotton® products to reduce the production cost and improve product quality.

The Company’s research and development activities adhere to strict procedures and utilize standardized processes. The Company is focused on further improving its core manufacturing technologies so that it can reduce waste and overall costs. In addition, the Company uses advanced automatic equipment as part of its processing system, including folding machines, plastic absorbing machines and sterilization systems. These improvements not only reduce production costs, but also enable the Company to further diversify its product lines.


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

 
13

 

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

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

 
Ÿ
Other Countries. Since the Company sells its products in international markets, its products are subject to regulations imposed by various governmental agencies in the markets where the Company’s products are sold.

All of the Company’s products exported to European countries must have a CE certificate, CE-certification or CE Marking, which is a conformity marking consisting of the letters “CE.” The CE Marking applies to products regulated by certain European health, safety and environmental protection legislation. The CE Marking is obligatory for products it applies to and the manufacturer affixes the marking in order to be allowed to sell its products in the European market.

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

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

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

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

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

In addition, manufacturers of medical devices distributed in the United States are subject to various other regulations, which include establishment registration, medical device listing, quality system regulation (“QSR”) and medical device reporting. Under the FDCA, any foreign establishment that manufactures, prepares, propagates, compounds or processes a medical device that is imported, or offered for import, into the United States is required to register its establishment with the FDA. In addition, any foreign establishment that engages in the manufacturing, preparation, assembly or processing of a medical device intended for commercial distribution in the United States is required to list its devices with the FDA. The Company’s subsidiary Winner Shenzhen, which exports all of its products, has registered its establishment with the FDA and has listed 47 medical and dental devices.

 
14

 

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

The Company is also required to report to the FDA if its products cause or contribute to a death or serious injury or malfunction in a way that would likely cause death or serious injury. The FDA can require companies to recall products which have material defects or deficiencies in design or manufacturing. The FDA can withdraw or limit the Company’s product clearances in the event of serious, unanticipated health or safety concerns. The Company may also be required to submit reports to the FDA of corrections and removals. As of the date of this Report, the Company had not received any complaints that any of its products had caused death or serious injury.

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

Environmental Compliance

The Company is subject to the requirements of U.S. federal, state, local and non-U.S., including China’s environmental and occupational safety and health laws and regulations. These include laws regulating air emissions, water discharge and waste management. The Company has an environmental management structure designed to facilitate and support its compliance with these requirements. Although it is the Company’s intent to comply with all such requirements and regulations, it cannot provide assurance that it is at all times in compliance. The Company has made and will continue to make capital and other expenditures to comply with environmental requirements, although such expenditures were not material during the past two years. Environmental requirements are complex, frequently change and tend to become more stringent over time. Accordingly, the Company cannot assure investors that environmental requirements will not change or become more stringent over time or that potential environmental cost and liabilities will not be material.
 
During fiscal year 2010, the Company did not make any material capital expenditures relating to environmental compliance.
 
Employees
 
As of September 30, 2010, the Company employed approximately 4,491 full-time employees. The Company believes that it maintains a satisfactory working relationship with its employees and it has no significant labor disputes or any difficulty in recruiting staff for its operations.

As required by applicable Chinese law, the Company has entered into employment contracts with all of its officers, managers and employees. The Company’s employees in China participate in a state social insurance scheme organized by the Chinese municipal and provincial governments. The Company is required to contribute to the scheme at rates ranging from 8% to 29% of the average monthly salary. The expenses related to this scheme were $1,222,516 and $626,606 for fiscal years 2010 and 2009, respectively.

Available information

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and other information are available free for charge from Securities Exchange Commission (SEC) website. These materials can be inspected and copied at the SEC’s Public Reference Room at 100 F Street, NE Washington, DC 20549. Information also can be obtained by mail at prescribed rates from the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC’s Internet site is http://www.sec.gov.

 
15

 

The Company’s Internet website, http://ir.winnermedical.com, provides its corporate governance which includes Corporate Governance Guidelines, Code of Business Conduct and Ethics and Winner Medical’s executive officers, directors and Board committees, including committee charters, and transactions in Winner Medical Group Inc. The website also includes its Annual Reports, most recent Quarterly Reports, Current Reports, any Proxy Statements filed and any amendments to such reports as soon as reasonably practicable following the electronic filing of such report with the SEC. In addition, the Company provides electronic or paper copies of its filings free of charge upon request.
 
Item 1A. Risk Factors

 An investment in the Company’s common stock involves a high degree of risk. In addition to the following risk factors, you should carefully consider the risks, uncertainties and assumptions discussed herein, and in other documents that the Company subsequently files with the SEC that update, supplement or supersede such information for which documents are incorporated by reference into this Report. Additional risks not presently known to the Company, or which the Company considers immaterial based on information currently available, may also materially adversely affect the Company’s business. If any of the events anticipated by the risks described herein occur, the Company’s business, cash flow, results of operations and financial condition could be adversely affected, which could result in a decline in the market price of the Company’s common stock, causing you to lose all or part of your investment.
 
RISKS RELATED TO THE COMPANY’S BUSINESS
 
 
Ÿ
The Company’s dependence upon international customers may impede its ability to supply products

During the fiscal year ended September 30, 2010, approximately 80.61% of the Company’s products were sold internationally. As a result, the Company is subject to risks associated with shipping products across borders, including shipping delays. If the Company cannot deliver its products on a competitive and timely basis, its relationships with international customers may be damaged and its financial condition could be harmed.

 
Ÿ
The Company engages in international sales, which expose it to trade restrictions

As a result of the Company’s product sales in various geographic regions, the Company may be subject to the risks associated with customs duties, export quotas and other trade restrictions that could have a significant impact on its revenue and profitability. While the Company has not encountered significant difficulties in connection with the sales of its products in international markets, the future imposition of, or significant increases in the level of, custom duties, export quotas or other trade restrictions could have an adverse effect on the Company. Further, the Company cannot assure that the laws of foreign jurisdictions where it sells and seeks to sell its products afford similar or any protection of its intellectual property rights as may be available under U.S. laws. The Company is directly impacted by the political, economic, military and other conditions in the countries where it sells or seeks to sell its products.

 
Ÿ
Expansion of the Company’s business may put additional pressure on its management, financial resources and operational infrastructure, impeding the Company’s ability to meet any increased demand for its products and possibly impairing its operating results

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

To accommodate any such growth and compete effectively, the Company may need to obtain additional funding to improve information systems, procedures and controls and expand, train, motivate and manage its employees, and such funding may not be available in sufficient amount. Also, as the Company is self-opening the PurCotton retail stores, there is a high capital expenditure for such start-up costs as inventory, rent, deposits and salary. As such, the Company may lose money during this expansion phase for its new business line. If the Company is not able to manage these activities and implement these strategies successfully to expand to meet any increased demand, the Company’s operating results could suffer.

 
16

 

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

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

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

The Company’s future business and results of operations depend to a significant part on the continued contributions of its key technical and senior management personnel, including Jianquan Li, Xiuyuan Fang and Nianfu Huo, who hold the titles of CEO, President and Chairman, CFO and Vice President and Senior Vice President and Chairman of Supervisory Board, respectively. They also depend to a significant part on the Company’s ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for its operations. For example, with its PurCotton retail business, the Company hired three experienced (in terms of retailing, e-commerce and brand building) general managers for its Beijing, Shanghai and Guangzhou markets. If the Company loses any of its key employees, or if any key employee fails to perform in his or her current position, or if the Company is unable to attract and retain skilled employees, the Company’s business could be suffered. Significant turnover of the Company’s senior management could significantly deplete the Company’s institutional knowledge held by its existing senior management team. The Company depends on the skills and abilities of these key employees in managing the manufacturing, technical, marketing and sales aspects of its business, any part of which could be harmed by staff turnover.

 
Ÿ
The Company’s products may contain defects, which could adversely affect its reputation and cause it to incur significant costs.

Despite testing by the Company, defects may be found in existing or new products. Any such defects could cause the Company to incur significant return and exchange costs, re-engineering costs, divert the attention of the Company’s engineering personnel from product development efforts, and cause significant customer relations and business reputation problems. Any such defects could force the Company to undertake a product recall program, which could cause it to incur significant expenses and could harm its reputation and that of its products. If the Company delivers defective products, its credibility and the market acceptance and sales of its products could be harmed.

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

Defects in the Company’s products could subject the Company to potential product liability claims arising from physical injury or property damage. The Company has limited product liability insurance covering the PRC, U.S. and Canadian markets, and does not have product liability insurance for other markets. Any successful claim brought against the Company in the markets not covered by any product liability insurance could adversely harm the Company’s reputation, business and financial condition.

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

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

In addition to research and development costs, the Company could be required to expend substantial funds for and commit significant resources to the following:
 
 
·
additional engineering and other technical personnel;
 
 
·
advanced design, production and test equipment;
 
 
·
manufacturing adjustment that meet changing customer needs;
 

 
17

 

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

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

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

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

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

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

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

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

As directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the companies’ internal controls over financial reporting in their annual reports, including Form 10-K. Management’s report on internal control over financial reporting is set out in Item 9A “Controls and Procedures” of the 2010 Form 10-K. As a smaller reporting company, the Company is not required to have auditor’s attestation reports at this time. However, should the Company be so required in the future, it can provide no assurance that the Company will be able to receive a positive attestation from its independent auditors. If significant deficiencies or material weaknesses in the Company’s internal controls are identified, the Company may not be able to remediate in a timely manner. In such case, investors and others may lose confidence in the reliability of the Company’s financial statements.

 
18

 

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

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

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

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

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

 
Ÿ
The Company only has a royalty-free license to use certain patents and technologies in its business.

The Company and its subsidiaries have licensed the right to use four patents and related technologies for nonwoven fabric manufacturing from its CEO, President and Director, Jianquan Li, on a royalty-free basis and the license of some of the patents and related technologies is provided under certain license agreements entered into between the Company and Jianquan Li in 2005 and 2007. If the licensor, Jianquan Li, unilaterally terminates or repudiates the license agreements, the Company’s business may be adversely affected as the Company may have to litigate or arbitrate to retain such license rights. Further, if any of such licensed patents and related technologies is challenged or infringed or any claim is made against it, the Company cannot defend or dispute such challenge or claim or take action to defend against such infringement directly and will need to rely on the licensor to do so.

 
Ÿ
The Company’s business could be subject to environmental liabilities.

The Company uses certain hazardous substances in its operations. Currently it does not anticipate any material adverse effect on its business, revenues or results of operations as a result of compliance with Chinese environmental laws and regulations. However, the risk of environmental liability and charges associated with maintaining compliance with environmental laws is inherent in the nature of the Company’s business, and there is no assurance that material environmental liabilities and compliance charges will not arise in the future.

 
19

 

 
Ÿ
If the ultimate consumers of products of which the Company’s products are components or the assembling parts successfully assert product liability claims against the Company due to defects in such products, the Company operating results may suffer and its reputation may be harmed.

The Company’s products are applied in the manufacturing of other products. Significant property damage and personal injuries can result from defective products. If the Company’s products are not properly packaged or assembled or used in the manufacturing process of other products, and if property damage and personal injuries result from products of which the Company’s products are components or the assembling parts, the Company could be subject to claims for damages and its reputation will be damaged, regardless of whether such claims are successful.

RISKS RELATED TO THE COMPANY’S INDUSTRY

 
Ÿ
The Company may not be able to maintain or improve its competitive position because of strong competition in the medical dressing and medical disposable industry, and the Company expects this competition to continue to intensify

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

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

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

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

In China, medical sanitary materials and dressings, including medical gauzes, absorbent cottons, bandages and disposable surgical suits, are supervised as medical devices and are administered by the Department of Medical Device of State Drug Administration of China. The technology and specifications of these types of products must conform to and comply with Regulations for the Supervision and Administration of Medical Devices of China and the relevant Chinese laws and standards. In addition, since the Company sells its products in the international markets, its products are subject to regulations imposed by various governmental agencies in the markets where its products are sold. For example, the Company’s products exported to the United States must be listed with the FDA. Certain of the Company’s products exported to the U.S. require 510(k) clearance. All the Company’s products exported to European countries must have the CE certificate. The Company also needs a Certificate of Foreign Manufacture for the Japanese market. These layers of regulation cause delays in the distribution of the Company’s products and may require the Company to incur operating costs resulting from the need to obtain approvals and clearances from regulators. Although the Company believes that it has reached the applicable standards and obtained the required certificates in the markets mentioned above, however, the Company may not be able to fully comply with all the licensing/certification requirements in these markets in the future.

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

The Company believes that the use of buying groups by customers is becoming a trend in its industry. These buying groups aggregate the demand of several different customers and then buy products in bulk at lower prices than any of the customers would be able to obtain individually. The Company has only limited production capacity. This makes it difficult for the Company to meet the large demand from those buying groups which represent overseas customers in developed countries. A single order of one kind of product from a top 500 multinational buyer could require the full manufacturing capacity of one of the Company’s plants. Although the Company has expanded its manufacturing capacity, its capacity is still not large enough to meet the demands of these clients. As a result, the Company may lose business to competitors who have more manufacturing capacity than does the Company.
 
20

 
RISKS RELATED TO DOING BUSINESS IN CHINA

 
Ÿ
Changes in China’s political or economic situation could harm the Company and its operational results

Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the Chinese government could change these economic reforms or any of the legal systems at any time. This creates uncertainty in the Company’s operations and profitability. Some examples are:
 
 
·
level of government involvement in the economy;
 
 
·
control of foreign exchange;
 
 
·
methods of allocating resources;
 
 
·
balance of payments position;
 
 
·
international trade restrictions; and
 
 
·
international conflict.
 
The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. As a result of these differences, the Company may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.

 
Ÿ
Future inflation in China may inhibit the Company’s business activities in China

In recent years, the Chinese economy has experienced periods of rapid expansion and widely fluctuating rates of inflation. These factors have led to the adoption by the Chinese government, from time to time, of various austerity measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity, including the Company’s business activities, in China, and thereby harm the market for the Company’s products.
 
 
Ÿ
The Company’s business is largely subject to the uncertain legal environment in China and your ability to legally protect your investment could be limited

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

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

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

 
21

 

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

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

 
Ÿ
The value of the Company’s securities will be affected by the foreign exchange rate between other currencies and Renminbi

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

 
Ÿ
Recent Chinese regulations relating to the establishment of offshore special purpose companies by Chinese residents and registration requirements for China resident shareholders owning shares in offshore companies may subject the Company’s China resident shareholders to personal liability and limit the Company’s ability to acquire Chinese companies or to inject capital into its operating subsidiaries in China, limit its subsidiaries’ ability to distribute profits to the Company, or otherwise materially and adversely affect the Company.

State Administration of Foreign Exchange, SAFE, issued a public notice in October 2005, “Circular 75,” requiring PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China, referred to as an “offshore special purpose company,” for the purpose of acquiring any assets of or equity interest in PRC companies and raising funds from overseas. In addition, any PRC resident who is the shareholder of an offshore special purpose company is required to amend his or her SAFE registration with the local SAFE branch, with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. To further clarify the implementation of Circular 75, the SAFE issued Circular 124 and Circular 106 on November 24, 2005 and May 29, 2007, respectively. Under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders who are PRC residents in a timely manner. If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE authorities. If the PRC subsidiaries of the offshore parent company do not report to the local SAFE authorities, they may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company and the offshore parent company may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions. The Company’s PRC resident beneficial owners may not have registered with the local SAFE branch as required under SAFE regulations. The failure or inability of these PRC resident beneficial owners to comply with the applicable SAFE registration requirements may subject these beneficial owners or the Company to fines, legal sanctions and restrictions described above.

 
22

 

 
Ÿ
Certain tax treatment that the Company presently enjoys in China is scheduled to expire over the next several years.
 
Some of the Company’s subsidiaries are entitled to certain preferential tax treatment which will expire in 2010, 2011 or 2012, as applicable. When such preferential tax treatment expires, the Company’s income tax expenses will increase, reducing its net income below what it would be if it continued to enjoy such preferential tax treatment.

RISKS RELATED TO THE MARKET FOR THE COMPANY’S STOCK

 
Ÿ
The Company is subject to penny stock regulations and restrictions

The SEC has adopted regulations which generally define so-called “penny stocks” as an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. As of December 7, 2010, the closing price for the Company’s common stock was $5.51. If the Company’s stock is a “penny stock,” it may become subject to Rule 15g-9 under the Exchange Act of 1934, or the “Penny Stock Rule.” This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors,” generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses. For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell the Company’s securities and may affect the ability of purchasers to sell any of the Company’s securities in the secondary market.

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

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

 
Ÿ
The market price for the Company’s common stock has been and may be volatile.

The trading price of the Company’s common stock has and may continue to fluctuate widely in response to various factors, some of which are beyond the Company’s control. These factors include, in addition to the risk factors set forth in this Report and the risk factors incorporated by reference herein, the Company’s quarterly operating results or the operating results of other companies in the Company’s industry, announcements by the Company or its competitors of acquisitions, new products, product improvements, commercial relationships, intellectual property, legal, regulatory or other business developments and changes in financial estimates or recommendations by stock market analysts regarding the Company or its competitors. In addition, the stock market in general, and the market for companies based in China in particular, has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated or disproportionate to their operating performance. These broad market fluctuations may materially affect the Company’s stock price, regardless of its operating results.

Further, the market for the Company’s common stock is limited and the Company cannot assure you that a larger market will ever be developed or maintained. The Company cannot predict what effect this limited market will have on the volume or trading price of its common stock. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce the Company’s market price due to the low volume of trading, which may in turn lower the volume of trading even more. As a result, these factors may make it more difficult or impossible for you to sell the Company’s common stock for a positive return on your investment.

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

Mr. Jianquan Li and his wife Ping Tse own approximately 74.68% of the Company’s outstanding voting securities as of December 8, 2010. As a result, they possess significant influence, giving them the ability, among other things, to elect a majority of the Company’s Board of Directors and to authorize or prevent proposed significant corporate transactions. Their ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer.

 
23

 

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

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

Item 1B. Unresolved Staff Comments
 
Not applicable.

Item 2. Properties

All land in China is owned by the government. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. The Company currently has land use rights to approximately 888,938 square meters in various parts of China, with total book value of approximately $4,820,641. All fees for acquiring such land use rights have been paid off as of September 30, 2010. The Company also has approximately 264,961 squares meters of structure in China, with total book value of approximately $25,003,191. Approximately 295,188 square meters of the Company’s lands and 36,397 square meters of structure are subject to mortgages.
 

Winner  Medical
Subsidiaries
 
Location
 
Land Size
(Square
Meters)
   
Net Book Value
(in US $)
 
Winner Medical & Textile Ltd. Jingmen
 
Te 1 Hangkong Road, Pailou Town, Jingmen City, Hubei Province , China
   
40,542
     
40,567
 
Winner Medical (Huanggang) Co., Ltd.
 
Te 1, Chibi Avenue, Huanggang City, Hubei Province, China
   
564,742
     
2,475,223
 
Winner Medical & Textile Ltd. Yichang
 
No. 20 Jiangxia Avenue, Jiangkou Town, Zhijiang City, Hubei Province, China
   
24,448
     
105,324
 
Winner Medical & Textile Ltd. Chongyang
 
Qingshan Park, Chongyang County, Hubei Province, China
   
73,268
     
7,574
 
Winner Medical & Textile Ltd. Jiayu
 
No. 172 Phoenix Avenue, Yuyue Town, Jiayu County, Hubei Province, China
   
34,167
     
11,773
 
Winner Industries (Shenzhen) Co., Ltd.
 
Winner Industrial Park, Bulong Road, Longhua, Shenzhen City, Guangdong Province, China.
   
29,064
     
1,038,239
 
Hubei Winner Textiles Co., Ltd.
 
No. 47 South Road of Jianshe, Yuekou Town, Tianmen City, Hubei Province. China
   
  122,707
     
   1,141,941
 
Total
       
  888,938
     
4,820,641
 

 
24

 

The following table summarizes the Company’s main structures it owned as of September 30, 2010.

Winner  Medical
Subsidiaries
 
Location
 
Structure Size
(Square
Meters)
   
Net Book Value
(in US $)
 
Winner Medical & Textile Ltd. Jingmen
 
Te 1 Hangkong Road, Pailou Town, Jingmen City, Hubei Province , China
    20,129       2,127,954  
Winner Medical (Huanggang) Co., Ltd.
 
Te 1, Chibi Avenue, Huanggang City, Hubei Province, China
    74,869       10,755,063  
Winner Medical & Textile Ltd. Yichang
 
No. 20 Jiangxia Avenue, Jiangkou Town, Zhijiang City, Hubei Province, China
    15,154       666,421  
Winner Medical & Textile Ltd. Chongyang
 
Qingshan Park, Chongyang County, Hubei Province, China
    44,586       3,101,624  
Winner Medical & Textile Ltd. Jiayu
 
No. 172 Phoenix Avenue, Yuyue Town, Jiayu County, Hubei Province, China
    20,700       1,120,540  
Winner Industries (Shenzhen) Co., Ltd.
 
Winner Industrial Park, Bulong Road, Longhua, Shenzhen City, Guangdong Province, China.
    36,626       4,668,711  
Hubei Winner Textiles Co., Ltd.
 
No. 47 South Road of Jianshe, Yuekou Town, Tianmen City, Hubei Province. China
    52,897       2,562,878  
Total
        264,961       25,003,191  

The following table summarizes the Company’s properties that are subject to mortgages as of September 30, 2010.

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

The Company entered into an agreement in 2005 with the local government agency of Huanggang to acquire 564,742 square meters, approximately 140 acres, of land which it plans to dedicate primarily to the construction of 100% cotton spunlace nonwoven fabric production facilities. The land use right certificate for 295,188 square meters, approximately 73 acres, of this land was issued to the Company in November 2005. The land use right certificate for 269,554 square meters, approximately 63 acres, of this land was issued to the Company in July 2007. As of September 30, 2010, the net book value of assets invested for this project is approximately $31.52 million, which includes $2.48 million in land, $10.75 million in facilities, $17.65 million in equipment and $0.64 million in other aspects of the project. Funds for this project were raised in the equity market and through bank loans.

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

 
25

 

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

Item 3. Legal Proceedings

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

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

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

Item 4. Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of the Company’s security holders during the fourth quarter of fiscal 2010.  

 
26

 

PART II

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

The Company’s common stock is quoted under the symbol “WWIN” on Nasdaq Global Market. The CUSIP number is 97476P204. Effective October 8, 2009, the Company migrated from the OTC Bulletin Board or OTCBB to the New York Stock Exchange AMEX, changing its symbol from “WMDG.OB.” to “WWIN.” Effective April 6, 2010, the Company migrated from the New York Stock Exchange AMEX to NASDAQ Global Market, under the same symbol of “WWIN.”

During 2005, the Company filed a request with NASD Regulation Inc. for clearance of quotations on the OTC Bulletin Board or OTCBB under Subsection (a)(5) of Rule 15c2-11 of the Securities Exchange Act of 1934. A clearance letter was issued to the Company on April 27, 2005 and the Company was issued a trading symbol “LVRC.OB.” As a result of a 1:1,500 reverse split of the Company’s common stock that became effective on October 26, 2005, the Company’s trading symbol on the OTC Bulletin Board was changed from “LVRC.OB” to “LVGC.OB.” On March 6, 2006, in connection with the Company’s name change from Las Vegas Resorts Corporation to Winner Medical Group Inc., the Company’s trading symbol was changed from “LVGC.OB” to “WMDG.OB.” As a result of a 1-for-2 reverse stock split of the Company’s common stock that became effective on October 6, 2009, the Company’s trading symbol changed from “WMDG.OB” to “WWIN.OB.” Effective on October 8, 2009, the Company’s trading symbol changed from “WWIN.OB” to “WWIN” as a result of its common stocks having been traded on New York Stock Exchange AMEX. Effective April 6, 2010, the Company migrated from the New York Stock Exchange AMEX to NASDAQ Global Market, under the same symbol of “WWIN.”

On April 30 and May 19, 2010, the Company completed a public offering of 1,587,000 shares of common stock at a price of $6.10 per share. Following this public offering, the total outstanding and issued shares were approximately 23,950,740 shares. On October 7, 2010, under the 2008-2009 Restricted Stock Unit Incentive Plan, the Company vested 179,507 units of restricted stock to eligible participants. Following the issuance of the restricted stock, the total outstanding and issued shares were 24,130,247 shares.
 
Stock Price Comparisons (NASDAQ composite transactions)

The following table sets forth, for the periods indicated, the high and low close prices for the Company’s common stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The Company’s fiscal year ended is on September 30.

 (Per share amounts in US Dollars)
 
First Quarter
   
Second
Quarter
   
Third Quarter
   
Fourth Quarter
 
2010 High
    7.4       7.6       7.3       6.4  
2010 Low
    4.2       5.8       5.3       4.4  
2009 High
    2.0       2.0       2.8       4.9  
2009 Low
    0.4       0.8       1.4       2.4  

* One-for-two reverse stock split became effective on October 6, 2009, which automatically converted two shares of the Company's common stock into one share of common stock. The share prices are adjusted on post split basis.

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

Approximate Number of Holders of the Company’s Common Stock

On September 30, 2010, there were approximately 1,421 stockholders of record of the Company’s common stock.

 
27

 

Dividend Policy

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

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of September 30, 2010, with respect to the Company’s equity compensation plans previously approved by stockholders and equity compensation plans not previously approved by stockholders.
 
   
Equity Compensation Plan Information
Plan Category
 
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
 
Weighted average exercise
price of outstanding options,
warrants and rights
 
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
   
(a)
 
(b)
 
(c)
Equity compensation plans approved by stockholders
 
766,000 [1]
 
$
0.00
 
1,734,000
Equity compensation plans not approved by stockholders
 
0
 
$
0.00
 
0
Total
 
766,000
 
$
0.00
 
1,734,000
 
[1] On October 7, 2007 the Company adopted the 2006 Amended and Restated Restricted Stock Unit Incentive Plan, whereby the Board was authorized to issue up to 2,500,000 shares of common stock (including incentive stock options), which reflected 1-for-2 reverse stock split, to certain employees, officers, directors, consultants, independent contractors and advisors of the Company or any parent, subsidiary or affiliate of the Company. As of September 30, 2010, 766,000 stock units have been granted under the plan, but none had vested. As such, there was no exercise price for these stock units at that time. On October 7, 2010, under the 2008-2009 Restricted Stock Unit Incentive Plan, a sub-plan of the 2006 Amended and Restated Restricted Stock Unit Incentive Plan, the Company vested 179,507 units of restricted stock, which reflected 1-for-2 reverse stock split to its 95 eligible participants who were employees of the Company and the Company’s senior management and key employees as designated by the Company’s Chief Executive Officer under authority of the Company’s Board of Directors.
 
Recent Sales of Unregistered Securities

 

The selected consolidated statement of income and comprehensive income data for the years ended September 30, 2010 and 2009 and the selected balance sheet data as of September 30, 2010, and 2009 are derived from the Company’s audited consolidated financial statements included elsewhere in this Report. The selected consolidated financial data for the year ended September 30, 2008, 2007 and 2006 are derived from the Company’s audited consolidated financial statements not included in this Report, and the selected balance sheet data as of September 30, 2008, 2007 and 2006 is derived from the Company’s audited consolidated financial statements not included in this Report.


 
28

 

   
Year Ended September 30,
 
   
2006
 
2007
 
2008
 
2009
 
2010
 
Statement of operations data:
                     
Sales Revenues:
 
$
63,873,058
 
$
70,280,960
 
$
85,505,762
 
$
98,385,603
 
$
115,030,651
 
                                 
Cost of Sales
   
46,335,354
   
52,869,597
   
64,086,581
   
70,444,383
   
80,473,292
 
                                 
Gross profit
   
17,537,704
   
17,411,363
   
21,419,181
   
27,941,220
   
34,557,359
 
                                 
Expenses:
                               
Administrative expenses
   
5,645,380
   
5,535,369
   
8,138,438
   
10,721,020
   
10,881,462
 
Amortization and depreciation
   
726,816
   
663,095
   
1,106,572
   
1,774,893
   
1,358,098
 
Other operating expenses
   
4,892,775
   
4,858,607
   
6,945,890
   
8,715,421
   
9,541,312
 
Provision for doubtful debt
   
25,789
   
13,667
   
85,976
   
230,706
   
(17,948)
 
Selling expenses
   
5,689,626
   
6,423,815
   
6,299,101
   
6,153,111
   
9,489,488
 
                                 
Total expenses
   
11,335,006
   
11,959,184
   
14,437,539
   
16,874,131
   
20,370,950
 
                                 
Income before taxes
   
6,326,690
   
5,662,391
   
5,563,166
   
11,421,176
   
14,664,295
 
Income taxes
   
516,635
   
-15,015
   
591,118
   
2,358,093
   
1,666,933
 
                                 
Net income attributable to Winner Medical Group Inc.
   
5,829,294
   
5,624,854
   
5,066,295
   
9,128,574
   
13,090,498
 
                                 
Pre-tax Income per common share
 
$
0.27
 
$
0.25
 
$
0.23
 
$
0.51
 
$
0.64
 
                                 
Earnings per share — basic
 
$
0.27
 
$
0.25
 
$
0.23
 
$
0.41
 
$
0.57
 
                                 
                              — diluted
 
$
0.27
 
$
0.25
 
$
0.23
 
$
0.41
 
$
0.56
 
                                 
Weighted average number of shares outstanding — basic
   
21,526,695
   
22,338,675
   
22,363,675
   
22,363,675
   
23,014,065
 
—diluted
   
21,530,862
   
22,338,675
   
22,510,962
   
22,403,237
   
23,383,532
 
                                 
Cash dividend declared per common share
   
-
   
-
   
-
   
-
   
-
 
                                 
Cash flows data:
                               
Net cash flows provided by/used in operating activities
 
$
10,272,612
 
$
7,662,424
 
$
9,644,401
 
$
14,688,351
 
$
12,653,828
 
Net cash flows provided by/used in investing activities
   
-13,676,919
   
-12,246,855
   
-11,084,844
   
-3,281,369
   
-9,401,100
 
Net cash flows provided by/used in financing activities
   
5,046,022
   
6,295,377
   
958,553
   
-8,426,513
   
1,962,602
 

   
September 30,
 
   
2006
 
2007
 
2008
 
2009
 
2010
 
Balance sheet data:
                     
Cash and cash equivalents
 
$
4,319,579
 
$
6,377,488
 
$
6,462,505
 
$
9,493,026
 
$
14,818,179
 
Working capital
   
15,285,070
   
12,379,247
   
12,370,246
   
23,023,033
   
42,575,107
 
Total assets
   
67,171,711
   
85,121,335
   
101,918,091
   
100,936,009
   
118,975,995
 
                                 
Total current liabilities
   
14,735,036
   
24,085,690
   
28,966,069
   
18,679,691
   
13,036,125
 
Total long term liabilities
   
21,707
   
22,857
   
41,965
   
41,899
   
42,699
 
Total liabilities
   
14,756,743
   
24,108,547
   
29,008,034
   
18,721,590
   
13,078,824
 
                                 
Total stockholders’ equity
   
52,265,472
   
60,821,657
   
72,761,751
   
82,131,604
   
105,796,972
 
 
 
29

 

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

The following management’s discussion and analysis should be read in conjunction with the Company’s financial statements and the notes thereto and the other financial information appearing elsewhere in this Report. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements. The Company’s financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP.

Overview

The Company’s business operations consist of the manufacturing and marketing, researching and developing of cotton-base medical dressings and medical disposables, as well as consumer products. The Company has ten wholly-owned operating subsidiaries and three joint ventures, all located in China. The Company has established several integrated manufacturing and processing lines for its core products. The Company’s product offerings include medical dressings and medical disposables, which consist of medical care and wound care, as well as PurCotton® products, spunlace, natural cotton nonwoven products. The Company manufactures its products in China and sells its medical dressings and medical disposables both in China and abroad, with Europe, the United States and Japan serving as the top three markets, and sells its PurCotton jumbo rolls in both China and abroad, while it sells PurCotton finished consumer products mainly in China.
 
The Company’s Business Operations
 
Winner Medical’s present business operations commenced February 1991 and involve the manufacture and marketing of its products primarily out of its facilities in China. The Company generates revenue through domestic (China) and foreign sales of a variety of medical dressings and medical disposables, which include medical care and wound care, such as gauze, wound dressings, disposable drapes, surgical gowns, face masks, cotton balls, etc. and a non-woven fabric made from 100% natural cotton products, that is, PurCotton® products, which consist of dry and wet tissues, beauty pads, baby wears, cleansing wipes, etc.
 
The Company has integrated manufacturing lines that provides its clients with the ability to procure certain products from a single supplier. In the developed countries, the Company provides its customers with its specialized design, manufacturing and packaging services. When the Company works on this basis, its clients are able to select the design, size, type and scale of the products the Company manufactures for them. The Company sells its own Winner® medical brand products in developing countries and regions including China, the Middle East, South America, Africa, and Southeast Asia.
 
The Company builds its PurCotton® finished products by its own marketing and sales efforts in the Chinese marketplace. Each store contains four types of PurCotton branded personal products and healthcare supplies. The main distribution channels are chain stores (PurCotton stores), on-line sales and wholesale to large customers. However, these distribution channels will require higher levels of capital expenditure, such as for inventory, rent, deposits and salary for sales forces, than the Company’s medical business. As such, the Company may be less profitable over the next few years, as this is a new business model and requires a significant level of start-up investment.
 
Industry Wide Trends that are Relevant to the Company’s Business
 
The medical dressings and medical disposables manufacturing market are continually evolving due to technological advances and new demands in the healthcare industry. The Company believes the trends in the industry towards improving medical care and patient conditions, changes in patient treatment approaches and technological advances will impact favorably on the demand for its products. The Company anticipates that these factors will result in a growth in sales of medical dressings and medical disposables and increased revenue for the Company.

The export of medical dressings and medical disposables from China has grown rapidly over the last few years. The Company believes that its sales over the next five years will grow in correlation to the growth of medical dressings and medical disposables export volume from China.
 
The medical dressings and medical disposables market is subject to consumption patterns and trends. One such trend or consumption pattern relates to the age demographics of the end users of the Company’s products. On average, the worldwide population is aging and life spans are generally increasing. As the general population begins to include a larger percentage of older people, the Company anticipates that more medical care will be required, and that will result in increased sales of the Company’s products.

 
30

 

 
The Company believes that there is a trend in its industry that is resulting in the geographical shift in product manufacturing from countries with high labor and manufacturing costs to countries, where labor and manufacturing costs are generally lower. As a result of the relatively low cost structure and rapid development of the Chinese economy, some foreign multinational companies are entering the Chinese market to seek suppliers to produce their goods. The Company believes that having large multinational companies seeking suppliers to produce their products in China will benefit the Company. In addition, the Company is negotiating with several large companies in the industry in developed countries which intend to outsource some of their production lines.
 
The Company estimates that China’s local market demand for medical dressings and medical disposables will continue to grow. This presents a significant opportunity for the Company. The Company is developing a distribution network to capture opportunities in China, mainly through local distributors, drugstore chains, and direct sales to hospitals. In order to better develop this market, certain employees have been placed in charge of communicating with local distributors in some major cities, such as Guangzhou, Fuzhou, Chengdu, Chongqing, Wuhan, Fuzhou, Shanghai, Beijing and Shenyang. The Company also directly sells to hospitals in Hong Kong.
 
Also affecting the Company’s industry is the growing sensitivity towards protecting the environment and increased health concerns, as consumers are becoming increasingly concerned about the environmental impact of the products they buy. Nonwoven medical dressings, medical instruments and medical disposables usually contain materials like rubber and polyester, which may result in restrictions on the purchase of these products under environmental protection regulations. At the same time, such materials are not biodegradable and composed of petroleum, a non-renewable energy resource. In recent years, cases about melamine-tainted milk, recycled edible oil and contaminated vegetables have significantly raised consumers’ awareness about the environment they live in, the food they eat, and the products they use. The Company believes this trend will be a competitive advantage because its new PurCotton® products are primarily made of natural cotton and manufactured in an environmentally-friendly fashion. The Company believes PurCotton® products are medium- to long-term growth contributor to its revenue, because they can be applied to consumer products as well as to the medical industry.  
 
Competition
 
The Company competes based upon manufacturing capacity, product quality, product cost, ability to produce a diverse range of products and logistical capabilities.
 
The Company encounters significant competition within China and throughout the world. Some of the Company’s competitors have greater financial resources, additional human resources, and more established market recognition in both domestic and international markets. The Company believes that its China-based competitors have lower labor costs, but their products often lack diversity. With respect to the Company’s competitors located outside China, it believes competitors in India generally utilize older equipment to manufacture their products, resulting in lower product quality. The Company’s competition in Europe and North and South America may have a geographic advantage in the EU and U.S. markets, however, the Company believes they are generally manufacturing on a smaller scale, have less product diversity and higher production costs.
 
As a natural product, it is environmentally friendly, reproducible, comfortable, non-allergenic and static-free. With this new technology, the Company can produce environmentally friendly 100% cotton nonwoven at a lower cost. The Company’s new technology modifies the conventional manufacturing method of nonwoven cloth. The Company refined the production equipment and reduced the number of steps in making nonwoven cloth. As a result, the new technology allows the Company to minimize raw material waste, save production costs, and improve production efficiency.

 
31

 

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

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

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

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

Results of Operations

Comparison for the Year Ended September 30, 2010 and 2009

The following sets forth certain of the Company’s income statement information for the years ended September 30, 2010 and 2009.
 
(All amounts, other than percentages, in thousand of U.S. dollars)

   
YEAR ENDED 9/30/10
   
YEAR ENDED 9/30/09
           
Item
 
In
Thousand
 
As a
Percentage
   
In Thousand
 
As a
Percentage
   
Amount
Change
 
% Change
 
Sales Revenue
 
$
115,031
 
100.00
%    
 
$
98,386
 
100.00
%   
 
$
16,645
 
16.92
%
Costs of Goods Sold
 
$
80,473
 
69.96
%
 
$
70,444
 
71.60
%
 
$
10,029
 
14.24
%
Gross profit
 
$
34,557
 
30.04
%
 
$
27,941
 
28.40
%
 
$
6,616
 
23.68
%
Other Operating Income, Net *
 
$
766
 
0.67
%
 
$
1,411
 
1.43
%
 
$
-645
 
-45.71
%
Exchange Difference, Net
 
$
493
 
0.43
%
 
$
1,055
 
1.07
%
 
$
-562
 
-53.27
%
Selling, general and administrative expenses
 
$
20,371
 
17.71
%
 
$
16,874
 
17.15
%
 
$
3,497
 
20.72
%
Interest Expense
 
$
129
 
0.11
%
 
$
459
 
0.47
%
 
$
-330
 
-71.90
%
Interest Income
 
$
98
 
0.09
%
 
$
69
 
0.07
%
 
$
29
 
42.03
%
Investment yields
 
$
236
 
0.21
%
 
$
388
 
0.39
%
 
$
-152
 
-39.18
%
Income tax
 
$
1,667
 
1.45
%
 
$
2,358
 
2.39
%
 
$
-691
 
-29.30
 %
Non-controlling interests
 
$
93
 
0.08
%
 
$
65
 
0.07
%
 
$
28
 
43.08
 %
Net income attributable to Winner Medical Group Inc.
 
$
13,090
 
11.38
%
 
$
9,129
 
9.28
%
 
$
3,961
 
43.39
%

*Note: Other operating income, net mainly consists of government subsidies and sales of leftover materials.

 
32

 

Product Information

Winner Medical is a diversified manufacturer and marketer of cotton-base medical dressings and medical disposables, as well as consumer products. In fiscal year ended September 30, 2010, the Company’s operations were conducted in two operating segments by products. The Company’s operating decisions, on-site management, internal reporting and performance assessments are conducted within each of the following two identified product segments:

Ÿ
Medical Products (Medical Care and Wound Care)
Ÿ
PurCotton® products

The following table illustrates the operating results for each product types for the years ended September 30, 2010 and 2009.
(All amounts, other than percentages, in thousand of U.S. dollars)

   
Medical Products
   
PurCotton® Products
   
Consolidated
 
Item
 
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
Revenue
  $ 104,903       92,917     $ 10,128       5,468     $ 115,031       98,386  
Gross Profit
  $ 31,146       26,490     $ 3,411       1,452     $ 34,557       27,941  
Gross Margin
    29.69 %     28.51 %     33.68 %     26.55 %     30.04 %     28.40 %
Income (Loss) from Operations Before Taxes
    14,081       11,486       583       -65       14,664       11,421  
Net Income attributable to Winner Medical Group Inc.
    12,291       8,931       799       198       13,090       9,129  
Profit Margin
    11.72 %     9.61 %     7.89 %     3.62 %     11.38 %     9.28 %

Sales by Region

The following table illustrates the sales revenues by regions from major geographic areas for the years ended September 30, 2010 and 2009. The table also provides the percentage of total revenues represented by each listed region.
 
Comparison of Sales by Regions for the years ended September 30, 2010 and 2009
(All amounts, other than percentages, in thousand of U.S. dollars)

   
Year Ended
on 9/30/10
in Thousand
 
As a
Percentage of
Total Revenues
 
Year Ended
on 9/30/09
in Thousand
 
As a
Percentage of
Total Revenues
 
Amount
Change
in Thousand
 
As a
Percentage
Change
 
Europe
   
42,278
 
36.75
%
39,599
   
40.25
%
2,679
   
6.77
%
  Britain
   
11,531
 
10.02
%
10,761
   
10.94
%
770
   
7.15
%
  Others
   
30,747
 
26.73
%
28,838
   
29.31
%
1,909
   
6.62
%
North and South America
   
24,480
 
21.28
%
18,824
   
19.13
%
5,656
   
30.05
%
  U.S.A
   
20,084
 
17.46
%
15,501
   
15.76
%
4,583
   
29.56
%
  Others
   
4,396
 
3.82
%
3,323
   
3.38
%
1,073
   
32.29
%
China*
   
22,308
 
19.39
%
16,602
   
16.87
%
5,706
   
34.37
%
Japan
   
18,226
 
15.84
%
17,607
   
17.90
%
619
   
3.52
%
Others
   
7,739
 
6.73
%
5,753
   
5.85
%
1,986
   
34.52
%
Total
   
115,031
 
100.00
%
98,386
   
100.00
%
16,645
   
16.92
%

*Note: Sales to Chinese market include medical sales to hospitals and chain drug stores, as well as PurCotton wholesale and retail businesses.

 
33

 

Sales Revenue

Sales revenue increased by approximately $16,645,000, or 16.92%, to approximately $115,031,000 for the fiscal year ended September 30, 2010 from approximately $98,386,000 for the fiscal year ended September 30, 2009. This increase was mainly attributable to increased sales orders from existing North and South American customers, and a slight increase from customers in European countries, as well as increased PurCotton® product sales from customers in China.

The net sales to customers in North and South America were approximately $24,480,000 for the year ended September 30, 2010, an increase of 30.05% compared to approximately $18,824,000 during the same period of 2009. Winner Medical has captured additional sales revenue through supplying products directly to several large companies in developed countries, which want to reduce their production cost. The Company has been gradually shifting its customer base to those larger companies in developed countries, particularly clients in the United States that outsource their production to the Company, and expects continued revenue growth in the future along those lines. Net sales to Europe grew approximately 6.77% versus the fiscal year 2009. Orders in Europe slightly increased as the debt crisis hit and clients located in Greece and Spain in particular postponed or cancelled orders. However, the Company maintained strong revenue growth from customers in Britain, Sweden and Germany.

Revenue from PurCotton® products increased by approximately $4,660,000 or 85.22%, to approximately $10,128,000 for the fiscal year ended September 30, 2010 from approximately $5,468,000 for the fiscal year ended September 30, 2009. PurCotton sales include wholesale to customers in China and Japan as jumbo rolls and finished medical products to hospitals, as well as retail to customers in China, which distribution channels include chain stores and online sales. The sale of PurCotton jumbo rolls and finished medical products to clients was $9,262,000, an increase of 69.38%, compared to $5,468,000 for the year ended September 30, 2009. The retail of PurCotton® products was $866,000, compared $Nil in the fiscal year 2009. The Company opened its first chain store on December 31, 2009.

The Company opened its first PurCotton store on December 31, 2009. As of December 8, 2010, the Company has 23 stores in major cities in Guangdong Province, including Shenzhen where the corporate headquarters are located. PurCotton stores are primarily located in downtown shopping malls. The stores range in size from 160 to 650 square feet. In order to build a healthy and sustainable retail business, the Company was slowing down the pace of chain stores opening during the third quarter. After a quarter’s careful evaluation on store location and size, product packaging and pricing, brand image, customer service and marketing, the Company has clearer operating and financial metrics. The Company started opening new stores in Guangzhou and other main cities in Guangdong province. In July 2010, the Company opened its first online PurCotton® store http://purcotton.mall.taobao.com, featuring its entire array of products on Taobao.com, the largest online trading platform in China. This is the Company’s first initiative to establish PurCotton B2C online stores in order to address the consumers’ evolving shopping preferences. In September 2010, the Company also built its own B2C trading website, www.purcotton.com, which is co-branded through its retail stores.

Cotton is the core component of the Company’s raw material, and its average purchasing price increased to approximately $2,117 per ton during the fiscal year 2010 from $1,531 per ton during the fiscal year 2009, an increase of approximately 38.28%. Under these pressures, the Company was increasing its selling prices to its customers to pass along raw material cost increases. However, the speed and range of the raw material cost increase was dramatic, while the Company’s customers took time to absorb the increase in the selling price and to deplete their inventories. This resulted in customers in China and Japan postponing orders. Meanwhile, net sales to Europe grew approximately 6.77% versus fiscal year 2009. Orders in Europe slowed for the entire industry as the debt crisis hit and customers located in Greece and Spain in particular postponed or cancelled orders.
 
Cost of Goods Sold

The Company’s cost of goods sold increased by $10,029,000, to $80,473,000, for the year ended September 30, 2010, from $70,444,000 for the year ended September 30, 2009. The costs of sales as a percentage of net revenues were 69.96% and 71.60% for the year ended September 30, 2010 and 2009, respectively. The decrease as percentage of revenue was mainly attributable to the improvement of the Company’s cost control and lean production management.

Gross Profits

The Company’s gross profit increased by $6,616,000 to $34,557,000 for the year ended September 30, 2010, from $27,941,000 for the year ended September 30, 2009. Gross profit as a percentage of net revenues was 30.04% for the year ended September 30, 2010, which increased compared with 28.40% for the year ended September 30, 2009.

 
34

 

The Company maintained higher gross margins than in fiscal year 2009, primarily as a result of an increase in its selling price to match the increasing cost of cotton. Cotton is the core component of the Company’s raw material. As a result, the Company signed long term contracts with its raw material suppliers and purchased cotton futures contracts in the China futures exchange market, as a way to hedge against some of the volatility in the cost of cotton. Its average pre-tax purchasing price increased to approximately $2,117 per ton during fiscal year 2010, from $1,531 per ton during fiscal year 2009, an increase of approximately 38.28%.
 
At the same time, the PurCotton retail business started on December 31, 2009, with a gross margin that is higher than the wholesale business. The gross margin for the PurCotton business was 33.68% in fiscal year 2010, compared with 26.55% in the same period last year.

Other Operating Income, Net


Exchange Difference, Net

The Company’s exchange difference, net, for the year ended September 30, 2010, decreased $562,000 to $493,000, from $1,055,000 for the year ended September 30, 2009. The decrease was mainly due to the RMB being relatively stable against the U.S. Dollar for the year ended September 30, 2010 compared with the same period last year. During fiscal years 2010 and 2009, the average exchange rates of RMB against US Dollar were 6.7651 and 6.8237 respectively; the appreciation of RMB against U.S. Dollar was 0.86%. The Company estimates that the exchange rate of RMB against the U.S. Dollar will continue to appreciate in the future. In order to minimize the currency exchange rate risk, the Company is (1) reinforcing and expanding its businesses in the China market, (2) inserting clauses on contracts that the selling price is subject to the fluctuation of currency and the price of raw materials, and (3) entering into several foreign currency forward contracts with a commercial bank to hedge future trade receipts in US Dollars against RMB. As of September 30, 2010, the total outstanding foreign currency forward contracts amounted to $78,000,000, comprised of $39,000,000 for the purchasing US dollars and $39,000,000 for the sale of US dollars, which is intended to provide some degree of hedge against currency fluctuations.
 
Selling, General and Administrative Expenses

The Company’s selling, general and administrative expenses increased $3,497,000 to $20,371,000 for the year ended September 30, 2010 from $16,874,000 for the year ended September 30, 2009. As a percentage of net revenues, the Company’s selling, general and administrative expenses slightly increased to 17.71% for the year ended September 30, 2010 from 17.15% for the year ended September 30, 2009. The increase of selling, general and administrative expenses was primarily due to the increase of transportation expense, salary and insurance fee, as well as leasing fee compared with the same period last year. The increase in selling expenses was primarily because of (1) an increase in transportation expenses, (2) a growth of salary and social insurance fees, and (3) an increase in leasing fees.
 
The transportation expenses increased approximately $1,345,000 when compared with the same period last year. The Company’s transportation expenses include China and export transportation fees. The Company’s transportation expenses within China were $1,170,000, 1.02% of total sales, and $1,051,000, 1.07% of total sales, for the year ended September 30, 2010 and 2009, respectively. The Company’s transportation expenses for export sales were $3,327,000, 2.89% of total sales, and $2,101,000, 2.14% of total sales, in the year ended September 30, 2010 and 2009, respectively. The rise was mainly due to a higher cost of maritime transport as a result of a higher petrol price in fiscal year 2010.
 
The Company increased the compensation of its sales personnel and administrative staff, as well as social insurance fee by $1,871,000, or 48.83% during the year ended September 30, 2010, when compared with the same period last year. This increase was primarily due to a $395,000, or 131.67% increase in stock incentive plans for employees and $489,000 increase in PurCotton retail staff cost, as well as $396,000 increase in social insurance in fiscal year 2010 compared with the same period last year.
 
The leasing fee for the Company increased by $411,000 during the year ended September 30, 2010 compared with the same period last year. The increase was mainly attributable to the opening of PurCotton chain stores compared with the same period last year.

 
35

 

Interest Expenses

Interest expenses decreased to approximately $129,000, 0.11% of total revenue, for the year ended September 30, 2010, as compared to approximately $459,000, 0.47% of total revenue, for the same period of 2009, a decrease of approximately $330,000, or 71.90%. The Company’s interest expense relates to bank loans that are primarily used to maintain daily operations. The percentage decrease of interest expense was mainly due to a decrease in the Company’s comparatively low average outstanding balance of bank loans.
 
Income taxes
 
The Company’s income tax provision for fiscal year ended September 30, 2010 was $1,667,000 as compared to $2,358,000 for the year ended September 30, 2009 which is a decrease of $691,000. Income tax as a percentage of income before income taxes was 11.37% for year ended September 30, 2010, compared with 20.65% for the same period of last year. The percentage decrease of income tax is mainly due to (1) an accrued tax provision of $601,000 for the dividend distributed to Winner medical group from Shenzhen Winner for $6,010,000 for the year ended September 30, 2009. However, there was no such income tax provision for the year ended September 30, 2010, and (2) a tax loss of $204,000 recognized for the year ended September 30, 2010 for Shenzhen PurCotton Technology Co., Ltd., or “Shenzhen PurCotton,” a wholly-owned subsidiary, which was established on December 7, 2009.
 
Effective January 1, 2008, the PRC Enterprise Income Tax Law, EIT Law and Implementing Rules impose a unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in China, unless they qualify under certain limited exceptions. As such, starting from January 1, 2008, three of the Company’s subsidiaries in China, including Winner Medical & Textile Ltd., Jingmen, Winner Medical & Textile Ltd. Jiayu, and Winner Medical & Textile Ltd. Yichang, are subject to an enterprise income tax rate of 25%. Starting from January 1, 2010, the Company’s subsidiary, Hubei Winner Textiles Co., Ltd is subject to an enterprise income tax rate of 25%.
 
The EIT Law gives existing foreign investment enterprises a five-year grandfather period, during which they can continue to enjoy their existing preferential tax treatment. For foreign investment enterprises that currently enjoy full exemption from PRC enterprise income tax for two years starting from the first profit-making year, which is followed by a 50% tax exemption for the next three years, the tax holidays are still valid. The tax rates applicable to the Company’s PRC subsidiaries are as follows:
 
36

 
   
Calendar Year Ending December 31
 
   
2009
   
2010
   
2011
   
2012
   
2013
 
Winner Medical & Textile Ltd., Jingmen
    25 %     25 %     25 %     25 %     25 %
Winner Medical & Textile Ltd. Jiayu
    25 %     25 %     25 %     25 %     25 %
Winner Medical & Textile Ltd. Yichang
    25 %     25 %     25 %     25 %     25 %
Winner Medical(Huanggang) Co., Ltd.
    0 %     12.5 %     12.5 %     12.5 %     25 %
Winner Medical & Textile Ltd. Chongyang
    12.5 %     12.5 %     25 %     25 %     25 %
Hubei Winner Textile Co., Ltd
  12.5% to 25     25 %     25 %     25 %     25 %
Shanghai Winner Medical Apparatus Co., Ltd.
    12.5 %     12.5 %     12.5 %     25 %     25 %
Winner Industries (Shenzhen) Co., Ltd.
    15 %     15 %     15 %     25 %     25 %
Shenzhen PurCotton Technology Co., Ltd.
    25 %     25 %     25 %     25 %     25 %
Beijing PurCotton Technology Co., Ltd
    N/A       25 %     25 %     25 %     25 %

In October 2006, for the purpose of improving operation efficiency, Hubei Winner Textiles Co., Ltd., “Winner Hubei,” merged with Winner Medical & Textile Ltd., Tianmen, “Winner Tianmen.” Income from Winner Hubei and Winner Tianmen were separately reported to the local tax office to reflect the different tax incentive status enjoyed by both entities. The applicable income tax rates for Winner Hubei and Winner Tianmen was 12.5% and 25%, respectively, for the calendar year 2009, and was 25% for both entities starting from January 1, 2010.
 
On September 11, 2009, Winner Industries (Shenzhen) Co., Ltd., "Winner Shenzhen,” obtained the High and New Technology Enterprise Certificate granted by the Ministry of Science and Technology of China, the Ministry of Finance and the State Administration of Taxation. Winner Shenzhen enjoyed an applicable corporate income tax rate of 15% from January 1, 2009 to the year end of 2011. The applicable income tax rate for Winner Shenzhen was 15% for the calendar years ending December 31, 2010 and 2009. For the calendar years 2012 and 2013, the tax rate will be subject to whether Winner Shenzhen can obtain the High and New technology Enterprise Certificate status.
 
Winner Medical (Hong Kong) Limited was incorporated in January 2008, and its applicable statutory tax rate for each of the years ended September 30, 2010 and 2009 was 16.5%.
 
No provision for US tax is made as the Company has no assessable income in the US for the year ended September 30, 2010 and 2009. The enterprise income tax of US is 34%.
 
On December 7, 2009, a wholly-owned subsidiary, Shenzhen PurCotton Technology Co., Ltd., “Shenzhen PurCotton,” was established. The applicable income tax rate for Shenzhen PurCotton is 25% for the calendar year ending December 31, 2010.

 
37

 

On September 1, 2010, a wholly-owned subsidiary, Beijing PurCotton Technology Co., Ltd., “Beijing PurCotton,” was established. The applicable income tax rate for Beijing PurCotton was 25% for the calendar year ending December 31, 2010.
 
Non-controlling interest

The Company’s financial statements reflect an adjustment to its consolidated group net income equal to $93,000 and $65,000 in the fiscal years 2010 and 2009, respectively, reflecting third party non-controlling interests in 40% in Winner Medical (Hong Kong) Limited and 40% in Shanghai Winner Medical Apparatus Co., Ltd., held by the non-controlling interests before September 13, 2010. On September 13, 2010, the Company’s wholly-owned subsidiary, Winner Industries (Shenzhen) Co., Ltd. purchased 40% of Shanghai Winner Medical Apparatus Co., Ltd. from the third party.
 
Net income attributable to Winner Medical Group Inc.
 
The net income attributable to Winner Medical Group Inc. increased to approximately $13,090,000 for the year ended September 30, 2010, as compared to approximately $9,129,000 for the same period of 2009, an increase of approximately $3,961,000, or approximately 43.39%. Net income as a percentage of sales revenue was 11.38% for the year ended September 30, 2010, compared with 9.28% for the same period of last year. The Company increased its selling price in conjunction with the rising cotton price. At the same time, the Company adopted lean production management to reduce manufacture unit cost and improve production efficiency.
 
However, given the increased volume of protective products sold as a result of H1N1 in the first quarter of 2010, and the high gross margin for those sales, the Company expects that the net income for the first quarter of 2011 may slightly decrease in comparison to the same period of 2010.
 

The Company incurred a gain in foreign currency translation, equal to a gain of $1,584,000 and a loss of $59,000 in the years ended September 30, 2010 and 2009, respectively. On July 21, 2005, China reformed its foreign currency exchange policy to adopt floating RMB exchange rates. On September 30, 2010 and 2009, the exchange rates of RMB against US dollar were 6.7011 and 6.8290 respectively; the RMB appreciation was 1.87%. As a result, the Company implemented different exchange rates in translating RMB into U.S. dollar in its financial statements for the years ended September 30, 2010 and 2009. The exchange rates of RMB against US Dollar were 6.7011, 6.8290 and 6.8183 for the years ended September 30, 2010, 2009 and 2008, respectively. The exchange rate of Hong Kong Dollar and the US Dollar were 7.7605, 7.7502 and 7.7787 for the years ended September 30, 2010, 2009 and 2008, respectively.

Inventory turnover
 
The Company’s inventory increased to approximately $15,945,000 as of September 30, 2010, as compared with approximately $14,933,000 as of September 30, 2009, an increase of approximately $1,012,000, or 6.78%. Raw material, backlog and finished products account for 31.40 %, 31.13 % and 34.47% of inventory in fiscal year 2010, respectively. The Company’s inventory turnover was 5.06 and 4.52 times for the year ended September 30, 2010 and 2009, respectively. The increase of inventory turnover was mainly attributable to the Company’s using SAP ERP systems to assist management to steer and control its stocked goods data. In addition, in order to improve and supervise its product quality, the Company controls a wider range of production chains from raw materials to finished products.

Accounts receivable collection period
 
Accounts receivable increased to approximately $15,672,000 as of September 30, 2010, compared to approximately $13,148,000 as of September 30, 2009, an increase of approximately $2,524,000, or 19.20%. The Company’s average accounts receivable collection period was 44.23 days and 44.97 days for the year ended September 30, 2010 and 2009, respectively. The Company’s ability to maintain a relatively stable accounts receivable collection period was mainly benefited from the Company’s adopting SAP ERP systems to assist management in evaluating and monitoring each individual client receivable status so as to minimize past due situations. In order to reduce loss on bad debts, the Company entered into a one-year insurance policy with China Export & Credit Insurance Corporation effective April 15, 2010, and will be automatically renewed subject to a one month written notice given by either party. The maximum insurance coverage from China Export & Credit Insurance Corporation is $2 million.

 
38

 

The account receivable collection age as of September 30, 2010 is illustrated as follows:

(All amounts, other than percentages, in thousand of U.S. Dollars)

Periods
 
Amount
in Thousand
   
As a
Percentage
 
       
 
 
Less than or equal to 3 months
  $ 15,496       98.87 %
                 
3 to 6 months
  $ 130