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EX-31.2 - EXHIBIT 31.2 - WINNER MEDICAL GROUP INCv228887_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - WINNER MEDICAL GROUP INCv228887_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - WINNER MEDICAL GROUP INCv228887_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - WINNER MEDICAL GROUP INCv228887_ex32-1.htm
   
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10−Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2011
 
¨
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
 
WINNER MEDICAL GROUP INC.
(Exact name of Registrant as Specified in its Charter)
 
Nevada
 
33-0215298
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification. No.)
     
Winner Industrial Park, Bulong Road
Longhua, Shenzhen City, 518109
The People’s Republic of China
(Address of principal executive offices) (Zip Code)
 
86-(755) 28138888
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
 
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 x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer          ¨
Accelerated filer                        ¨
Non-accelerated filer            ¨ (Do not check if a smaller reporting company)
Smaller reporting company       x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨   No x
 
The number of shares outstanding of each of the issuer’s classes of common equity, as of August 10, 2011 is as follows:
 
Class of Securities
 
Shares Outstanding
Common Stock, US$0.001 par value
 
24,140,247

 
 

 

TABLE OF CONTENTS
 
       
Page
   
PART I
   
         
Item 1.
 
Condensed Consolidated Financial Statements (Unaudited).
 
3
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
5
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk.
 
22
Item 4.
 
Controls and Procedures.
 
22
         
   
PART II
   
         
Item 1.
 
Legal Proceedings.
 
23
Item 1A.
 
Risk Factors.
 
23
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds.
 
23
Item 3.
 
Defaults Upon Senior Securities.
 
23
Item 4.
 
(Removed and Reserved).
 
23
Item 5.
 
Other Information.
 
23
Item 6.
 
Exhibits.
 
23

 
2

 

PART I
FINANCIAL INFORMATION

ITEM 1.                CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).

WINNER MEDICAL GROUP INC.

Condensed Consolidated Financial Statements (Unaudited)
For the three and nine months ended June 30, 2011 and 2010

 
3

 
 
WINNER MEDICAL GROUP INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Page
Condensed Consolidated Balance Sheets
F-1
Condensed Consolidated Statements of Income and Comprehensive Income
F-2
Condensed Consolidated Statements of Stockholders’ Equity
F-3
Condensed Consolidated Statements of Cash Flows
F-4
Notes to Condensed Consolidated Financial Statements
F-5
 
 
4

 

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
June 30,
   
September 30,
 
   
2011
   
2010
 
   
US$
   
US$
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
    16,991,651       14,818,179  
Restricted bank deposits
    94,599       285,119  
Restricted broker margin account
    1,293,172       0  
Held-to-maturity investments
    0       1,497,607  
Accounts receivable, less allowances for doubtful accounts of US$171,359 and US$230,200 at June 30, 2011 and September 30, 2010, respectively
    20,482,777       15,672,446  
Amounts due from affiliated companies
    208,243       999  
Inventories
    25,186,896       15,945,101  
Prepaid expenses and other current assets
    11,208,509       6,929,066  
Income taxes recoverable
    28,118       33,974  
Deferred tax assets
    363,087       428,741  
Total current assets
    75,857,052       55,611,232  
Property, plant and equipment, net
    63,667,803       60,110,367  
Investment in equity investees
    2,322,645       2,159,784  
Intangible assets, net
    132,681       125,079  
Prepaid expenses and other receivables
    1,603,471       637,748  
Deferred tax assets
    1,013,554       331,785  
Total assets
    144,597,206       118,975,995  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
               
Short-term bank loans
    8,498,671       0  
Accounts payable
    8,134,774       5,362,155  
Accrued payroll and employee benefits
    2,937,325       2,393,700  
Customer deposits
    722,979       687,275  
Accrued and other liabilities
    3,272,597       3,057,445  
Amounts due to affiliated companies
    61,060       58,338  
Income taxes payable
    1,593,584       1,477,212  
Total current liabilities
    25,220,990       13,036,125  
Deferred tax liabilities
    44,213       42,699  
Total liabilities
    25,265,203       13,078,824  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Common stock, par value $0.001 per share; authorized 247,500,000, issued and outstanding June 30, 2011 – 24,130,247 shares; September 30, 2010 –23,950,740 shares
    24,131       23,951  
Additional paid-in capital
    40,799,040       40,154,494  
Retained earnings
    57,660,227       48,730,034  
Statutory reserves
    4,644,243       4,585,731  
Accumulated other comprehensive income
    16,059,711       12,302,762  
Total Winner Medical Group Inc.
 
 
   
 
 
stockholders’ equity
    119,187,352       105,796,972  
                 
Non-controlling interests
    144,651       100,199  
Total equity
    119,332,003       105,897,171  
                 
Total liabilities and equity
    144,597,206       118,975,995  

See accompanying notes to condensed consolidated financial statements.

 
F-1

 

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

   
Three months ended 
June 30,
   
Nine months ended 
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
US$
   
US$
   
US$
   
US$
 
                         
Net sales
    41,536,465       30,926,910       108,460,785       86,788,642  
                                 
Cost of sales
    (30,227,856 )     (21,993,948 )     (78,318,957 )     (61,067,648 )
Gross profit
    11,308,609       8,932,962       30,141,828       25,720,994  
                                 
Other operating income/(loss) , net
    (2,831 )     117,083       (104,786 )     440,466  
Government subsidies
    90,407       28,287       1,304,622       193,991  
Realized gain/(loss) on commodity financial instruments
    65,037       0       (1,694,632 )     0  
Exchange difference, net
    (270,910 )     (152,908 )     (415,041 )     (233,089 )
Selling, general and administrative expenses
    (7,293,780 )     (5,277,382 )     (19,151,578 )     (14,741,028 )
                                 
Income from operations
    3,896,532       3,648,042       10,080,413       11,381,334  
Interest income
    59,088       13,295       105,256       41,038  
Interest expense
    (134,793 )     (21,545 )     (227,978 )     (120,048 )
Equity in earnings of 50 percent or less owned persons
    179,745       103,954       362,860       148,979  
Income before income taxes
    4,000,572       3,743,746       10,320,551       11,451,303  
                                 
Income taxes
    (565,349 )     (347,881 )     (1,287,744 )     (1,549,977 )
Net income
    3,435,223       3,395,865       9,032,807       9,901,326  
                                 
Net (income)/ loss attributable to non-controlling interests
    (10,698 )     (21,928 )     (44,102 )     69,861  
Net income attributable to Winner Medical Group Inc.
    3,424,525       3,373,937       8,988,705       9,971,187  
                                 
Comprehensive income:
                               
Net income
    3,435,223       3,395,865       9,032,807       9,901,326  
Foreign currency translation difference
    1,385,899       438,928       3,757,299       290,862  
Comprehensive (income)/ loss attributable to non-controlling interests
    (10,672 )     (21,648 )     (44,452 )     70,302  
                                 
Comprehensive income attributable to Winner Medical Group Inc.
    4,810,450       3,813,145       12,745,654       10,262,490  
                                 
Net income attributable to Winner Medical Group Inc.  per share
                               
- basic
    0.14       0.14       0.37       0.44  
- diluted
    0.14       0.14       0.37       0.43  
                                 
Weighted average common stock outstanding
                               
- basic
    24,130,247       23,378,040       24,125,593       22,701,840  
- diluted
    24,601,088       24,060,419       24,621,897       23,112,894  

See accompanying notes to condensed consolidated financial statements.

 
F-2

 

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
 
     
Equity attributable to Winner Medical Group Inc.
             
    
 
   
 
   
 
   
 
   
Accumulated
   
 
       
 
Common stock
   
Additional
               
other
   
Non-
       
       
Stock
   
 
   
paid-in
   
Retained
   
Statutory
   
comprehensive
   
controlling
   
Total
 
     
outstanding
   
Amount
   
capital
   
earnings
   
reserves
   
income
   
interests
   
equity
 
           
US$
   
US$
   
US$
   
US$
   
US$
   
US$
   
US$
 
                                                   
Balance at September 30, 2009 (restated  to reflect one-for-two reverse stock split with effective from October 6, 2009)
    22,363,740       22,364       31,166,123       36,797,172       3,428,095       10,717,850       82,815       82,214,419  
Issuance of  common stock – net of offering costs
    1,587,000       1,587       8,791,876       0       0       0       0       8,793,463  
Restricted stock units granted
    0       0       695,758       0       0       0       0       695,758  
Net income/(loss)
    0       0       0       13,090,498       0       0       (93,136 )     12,997,362  
Foreign currency translation difference
    0       0       0       0       0       1,584,912       (747 )     1,584,165  
Transfer to statutory reserves
    0       0       0       (1,157,636 )     1,157,636       0       0       0  
Purchase of non-controlling interests
    0       0       (499,263 )     0       0       0       111,267       (387,996 )
Balance at September 30, 2010
    23,950,740       23,951       40,154,494       48,730,034       4,585,731       12,302,762       100,199       105,897,171  
Restricted stock units granted
    0       0       644,726       0       0       0       0       644,726  
Issuance of restricted stock units
    179,507       180       (180 )     0       0       0       0       0  
Net income
    0       0       0       8,988,705       0       0       44,102       9,032,807  
Transfer to Statutory reserves
    0       0       0       (58,512 )     58,512       0       0       0  
Foreign currency translation difference
    0       0       0       0       0       3,756,949       350       3,757,299  
Balance at June 30, 2011
    24,130,247       24,131       40,799,040       57,660,227       4,644,243       16,059,711       144,651       119,332,003  

See accompanying notes to condensed consolidated financial statements.

 
F-3

 

WINNER MEDICAL GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
  
   
Nine months ended
June 30,
 
   
2011
   
2010
 
   
US$
   
US$
 
Cash flows from operating activities
           
Net income
    9,032,807       9,901,326  
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation and amortization of property, plant and equipment
    4,030,486       3,799,724  
Amortization of intangible assets
    20,789       19,435  
Loss on disposal of property, plant and equipment
    246,097       11,571  
Change in fair value of financial instruments, net
    (71,071 )     (97,690 )
Equity in earnings of 50 percent or less owned persons
    (362,860 )     (148,979 )
Investment income from held-to-maturity investments
    (55,835 )     0  
Stock-based compensation expenses
    644,726       782,623  
Deferred tax
    (589,145 )     160,534  
Changes in operating assets and liabilities:
               
Restricted bank deposits
    193,677       (71,646 )
Restricted broker margin account
    (1,293,173 )     0  
Accounts receivable
    (4,254,544 )     (2,737,255 )
Amounts due from affiliated companies
    (7,208 )     (5,754 )
Inventories
    (8,676,339 )     (2,088,530 )
Prepaid expenses and other receivables
    (3,949,729 )     (3,857,471 )
Income taxes recoverable
    7,061       (2,441 )
Accounts payable
    2,582,464       781,071  
Accrued payroll and employee benefits
    458,738       (158,800 )
Customer deposits
    11,332       (209,524 )
Accrued and other liabilities
    309,727       55,206  
Amounts due to affiliated companies
    653       (48,896 )
Income taxes payable
    84,838       (479,988 )
Net cash (used in)/provided by operating activities
    (1,636,509 )     5,604,516  
                 
Cash flows from investing activities
               
Purchase of property, plant and equipment
    (5,070,594 )     (3,713,082 )
Purchase of intangible assets
    (23,904 )     0  
Proceeds from disposal of property, plant and equipment
    39,139       16,339  
Deposits paid for property, plant and equipment
    (1,589,928 )     (1,455,096 )
Proceeds from disposal of held-to-maturity investments
    31,229,055       0  
Purchase of held-to-maturity investments
    (29,647,424 )     0  
Net cash used in investing activities
    (5,063,656 )     (5,151,839 )
                 
Cash flows from financing activities
               
Proceeds from bank borrowings
    12,752,313       0  
Repayment of bank borrowings
    (4,390,219 )     (5,873,715 )
Purchase of non-controlling interests
    (211,490 )     0  
Proceeds from issuance of common stock
    0       8,793,463  
Net cash provided by financing activities
    8,150,604       2,919,748  
                 
Effect of exchange rate changes
    723,033       (129,438 )
                 
Net increase in cash and cash equivalents
    2,173,472       3,242,987  
Cash and cash equivalents, beginning of period
    14,818,179       9,493,026  
Cash and cash equivalents, end of period
    16,991,651       12,736,013  
                 
Supplemental disclosures of cash flows information:
               
Cash paid during the period for:
               
Interest
    227,978       120,048  
Income taxes
    1,864,125       1,872,343  

See accompanying notes to condensed consolidated financial statements.

 
F-4

 

WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1.  Basis of Preparation of Financial Statements

The accompanying condensed consolidated financial statements of Winner Medical Group Inc. (“Winner Medical” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America for interim consolidated financial information. Accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements.

The interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of the management of the Company, are necessary for a fair presentation of the information contained therein. The condensed consolidated balance sheet as of June 30, 2011 and the condensed consolidated statements of income and comprehensive income for the three and nine months ended June 30, 2011 is not necessarily indicative of the results that may be expected for the entire year ending September 30, 2011. It is suggest that interim consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2010 and notes thereto.

On October 6, 2009, the Company’s Board of Directors approved and authorized the Company to complete a one-for-two reverse split of the Company’s common stock, decreasing the Company’s authorized capital to 247,500,000 shares of common stock and 2,500,000 shares of preferred stock, par value $0.001 per share. Pursuant to the Nevada Revised Statues, shareholder approval of this action was not required. The authorized shares, the par value per share, earning per share, common stock outstanding and weighted average common stock outstanding as referred to in these condensed consolidated financial statements have been restated where applicable to give retroactive effect of the reverse stock split.

2.  Description of Business

The principal activities of the Company and its subsidiaries consist of research and development, manufacturing and trading of medical dressings and medical disposables, as well as natural cotton consumer products. Activities of the Group are principally conducted by subsidiaries operating in the People’s Republic of China (the “PRC”).

3.  Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements (ASU No. 2010-06). This pronouncement is an authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has not completed its assessment of the impact, if any, that the disclosures of activity within Level 3 fair value measurements will have on its financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This pronouncement is an authoritative guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited, and is applicable to the Company’s fiscal year beginning October 1, 2012. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) Presentation of Comprehensive Income (“ASU No. 2011-05”). This pronouncement is an authoritative guidance on the presentation of comprehensive income that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. The Company adopted this guidance on the disclosure requirements of the comprehensive income.

 
F-5

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
4.  Net Income Attributable to Winner Medical Group Inc. Per Share

Net income attributable to Winner Medical Group Inc. per share- Basic net income attributable to Winner Medical Group Inc. per share is computed by dividing net income attributable to Winner Medical Group Inc. available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income attributable to Winner Medical Group Inc. per share gives effect to all dilutive potential ordinary shares outstanding during the period.  The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.  At June 30, 2011 and 2010, the basic and diluted net income attributable to Winner Medical Group Inc. per share calculated in accordance with FASB ASC 260, Earnings Per Share, are reconciled as follows:

   
Three months ended 
June 30,
 
   
2011
   
2010
 
   
US$
   
US$
 
Basic income per share
           
             
Net income attributable to Winner Medical Group Inc. for the period
    3,424,525       3,373,937  
                 
Weighted average common stock outstanding
    24,130,247       23,378,040  
                 
Net income attributable to Winner Medical Group Inc. per share
    0.14       0.14  
                 
Diluted income per share
               
                 
Net income attributable to Winner Medical Group Inc. for the period
    3,424,525       3,373,937  
                 
Weighted average common stock outstanding
    24,130,247       23,378,040  
                 
Effect of dilution
               
                 
Restricted stock
    470,841       682,379  
                 
Weighted average common stock outstanding
    24,601,088       24,060,419  
                 
Net income attributable to Winner Medical Group Inc. per share
    0.14       0.14  

   
Nine months ended
 June 30,
 
   
2011
   
2010
 
   
US$
   
US$
 
Basic income per share
           
             
Net income attributable to Winner Medical Group Inc. for the period
    8,988,705       9,971,187  
                 
Weighted average common stock outstanding
    24,125,593       22,701,840  
                 
Net income attributable to Winner Medical Group Inc. per share
    0.37       0.44  
                 
Diluted income per share
               
                 
Net income attributable to Winner Medical Group Inc. for the period
    8,988,705       9,971,187  
                 
Weighted average common stock outstanding
    24,125,593       22,701,840  
                 
Effect of dilution
               
                 
Restricted stock
    496,304       411,054  
                 
Weighted average common stock outstanding
    24,621,897       23,112,894  
                 
Net income attributable to Winner Medical Group Inc. per share
    0.37       0.43  

As of June 30, 2011, there was no potential common shares relating to options in the Company.

 
F-6

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
5.
Held-to-maturity investments

As of June 30, 2011, there is no held-to-maturity investment and as of September 30, 2010, the Company’s held-to-maturity investment securities portfolio consisted of one product purchased from Industrial and Commercial Bank of China. That held-to-maturity investment was a money management product that matured on June 30, 2011. The carrying value of the investment security, approximate to the fair value, was US$Nil and US$1,497,607 as of June 30, 2011 and September 30, 2010, respectively. Interest on these investments was included in interest income by US$37,221 and US$Nil during the three months ended June 30, 2011 and 2010, respectively, and during the nine months ended June 30, 2011 and 2010 was US$55,835 and US$Nil respectively.
 
6.
Inventories

Inventories by major categories are summarized as follows:
   
June 30,
   
September 30,
 
   
2011
   
2010
 
   
US$
   
US$
 
Raw materials
    12,298,953       5,006,853  
Work in progress
    5,818,032       4,964,070  
Finished goods
    7,069,911       5,974,178  
      25,186,896       15,945,101  

7.
Credit Facilities and Pledged Assets

The subsidiaries in Shenzhen and Huanggang have credit lines with Shenzhen Branch of China Merchants Bank, Shenzhen Branch of the Industrial and Commercial Bank of China and Huanggang Branch of the Industrial and Commercial Bank of China, representing trade acceptances, loans and overdrafts.

As of June 30, 2011, the Company had approximately $28.59 million bank credit facilities from three commercial banks. After utilizing bank loans of $8.50 million, there are $20.09 million unused bank credit facilities, consisting of approximately $6.95 million from Shenzhen Branch of China Merchants Bank, approximately $9.27 million from Shenzhen Branch of the Industrial and Commercial Bank of China, and approximately $3.87 million from Huanggang Branch of the Industrial and Commercial Bank of China. As of September 30, 2010, the Company had approximately $25.87 million bank credit facilities from three commercial banks; and after utilizing $1.80 million letter of credit as of September 30, 2010, included in accounts payable in the accompanying balance sheet, there are $24.07 million unused bank credit facilities. The maturities of these facilities are generally up to August 2011. The weighted average interest rates on short-term borrowings for the nine months ended June 30, 2011 and 2010 were 5.40% and 4.28% per annum, respectively. There are no significant covenants or other financial restrictions relating to the Company’s facilities except that at June 30, 2011, buildings with net book values of US$3,828,092 and at September 30, 2010, leasehold land and buildings with net book values of US$6,288,904, have been pledged as collateral for the above facilities. During the nine months ended June 30, 2011, the Company obtained charge release from bank on its previously pledged leasehold land.

As of June 30, 2011 and September 30, 2010, the Company had the following short-term bank loans:
 
   
June 30,
   
September 30,
 
   
2011
   
2010
 
   
US$
   
US$
 
             
Bank loans repayable within one year
    8,498,671       0  
                 
Original currency in Chinese Renminbi
    55,000,000       0  

Bank loans as of June 30, 2011 that are secured by buildings consisted of the following:
 
           
June 30,
 
           
2011
 
           
US$
 
Loan
   
Loan period
       
A     2010.10.08-2011.09.18       2,317,819  
B     2011.03.03-2011.09.03       3,090,426  
C     2011.04.01-2012.03.02       3,090,426  
              8,498,671  
 
 
F-7

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
8.
Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:
 
   
June 30,
   
September 30,
 
   
2011
   
2010
 
   
US$
   
US$
 
             
Value added tax receivable
    6,266,528       3,533,190  
Advance to suppliers
    3,289,738       2,054,529  
Rental deposit
    723,561       0  
Deferred expenditure
    215,885       212,823  
Fair value of financial instruments
    79,560       387,351  
Others
    633,237       741,173  
      11,208,509       6,929,066  

9.
Income Taxes

United States

The Company is incorporated in the United States of America and is subject to United States federal taxation. No provisions for income taxes have been made as the Company has no taxable income for the first three quarters. There are no current taxes due to Internal Revenue Service of United States as of June 30, 2011. The applicable income tax rate for the Company for the three and nine months ended June 30, 2011 and 2010 is 34%.

Cayman Islands

Winner Group Limited, a wholly owned subsidiary of the Company, is incorporated in the Cayman Islands and, under the current laws of the Cayman Islands, is not subject to income taxes.

Hong Kong

Winner Medical (Hong Kong) Limited (“Winner HK”), a 60% owned subsidiary of the Company, is incorporated in Hong Kong. Winner HK is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. Winner HK was incorporated in January 2008 and the applicable statutory tax rate for the three and nine months ended June 30, 2011 and 2010 was 16.5%.

On January 25, 2011, a wholly-owned subsidiary HK PurCotton Co., Ltd. “HK PurCotton” was established.  The applicable statutory tax rate for HK PurCotton was 16.5% for the three and nine months ended June 30, 2011.

 PRC

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

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

Winner Medical (Huanggang) Co., Ltd. enjoys its full tax exemption from January 1, 2008, and the 50% tax exemption from January 1, 2010. The preferential tax incentives will expire on December 31, 2012. Winner Medical & Textile Ltd., Chongyang enjoys the 50% tax exemption from January 1, 2008, and from January 1, 2011, Winner Medical & Textile Ltd., Chongyang will be subject to an enterprise income tax rate of 25%. Shanghai Winner Medical Apparatus Co., Ltd. enjoys the 50% tax exemption from January 1, 2009 and will be expired on December 31, 2011.

 
F-8

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
9.
Income Taxes - Continued

               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 calendar years 2008 and 2009 and was 25% for both entities starting from January 1, 2010.

On September 11, 2009, Winner Industries (Shenzhen) Co., Ltd., or "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 calendar year end of 2011. The applicable income tax rate for Winner Shenzhen was 15% for the three and nine months ended June 30, 2011 and 2010.

On December 7, 2009, a wholly-owned subsidiary Shenzhen PurCotton Technology Co., Ltd., or “Shenzhen PurCotton” was established.  The applicable income tax rate for Shenzhen PurCotton was 25% for the three and nine months ended June 30, 2011.

On September 1, 2010, a wholly-owned subsidiary Beijing PurCotton Co., Ltd., or “Beijing PurCotton”, was established.  The applicable income tax rate for Beijing PurCotton was 25% for the three and nine months ended June 30, 2011.

               On October 18, 2010, a wholly-owned subsidiary Huanggang Winner Cotton Co., Ltd. was established.  The applicable income tax rate for Huanggang Winner Cotton Co., Ltd. was 25% for the three and nine months ended June 30, 2011.

               On November 19, 2010, a wholly-owned subsidiary Guangzhou PurCotton Co., Ltd., or “Guangzhou PurCotton”, was established.  The applicable income tax rate for Guangzhou PurCotton was 25% for the three and nine months ended June 30, 2011.

On December 3, 2010, a wholly-owned subsidiary Shanghai PurCotton Co., Ltd., or “Shanghai PurCotton”, was established.  The applicable income tax rate for Shanghai PurCotton was 25% for the three and nine months ended June 30, 2011.

On October 1, 2007, the Company adopted FASB ASC 740 (Former FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109). The Company’s policy classifies all interest and penalties related to unrecognized tax benefits, if any, as a component of income tax provisions. The Company performed self-assessment and the Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. At June 30, 2011, the management considered that the Company had no uncertain tax positions affecting its consolidated financial position and results of operations or cash flows, and will continue to evaluate for the uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s consolidated financial statements for the three and nine months ended June 30, 2011 and 2010, respectively. The Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities and the major one is the China Tax Authority. The open tax year for examination in PRC is 5 years.

 
F-9

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
9.
Income Taxes - Continued

A reconciliation between the provision for income taxes computed by applying the statutory tax rate in PRC to income before income taxes and the actual provision for income taxes is as follows:
 
   
Nine months ended
June 30,
 
   
2011
   
2010
 
   
US$
   
US$
 
             
Tax calculated at domestic statutory rate (2011: 25%; 2010: 25%)
    2,580,138       2,862,880  
Effect of different tax rates in various jurisdictions
    96,791       117,543  
Tax effect of preferential tax treatment
    (1,161,515 )     (1,157,022 )
Tax effect of expenses not deductible for tax purpose
    32,195       8,813  
Tax effect of government subsidies not subject to tax
    (189,764 )     (43,644 )
Change in valuation allowance
    (44,260 )     47,407  
Over provision in previous years
    (70,523 )     (282,742 )
Others
    44,682       (3,258 )
      1,287,744       1,549,977  

10.
Related Party Transactions

During the three months ended June 30, 2011 and 2010, the Company purchased goods from L+L Healthcare Hubei Co., Ltd. (“L+L”), for US$6,861 and US$20,857 and sold goods to it for US$18,373 and US$211, respectively. During the nine months ended June 30, 2011 and 2010, the Company purchased goods from L+L for US$139,817 and US$61,715 and sold goods to it for US$$40,466 and US$462, respectively. As of June 30, 2011 and September 30, 2010, the amounts due to L+L were US$Nil and US$20,363, respectively. L+L declared dividends of US$200,000 and US$Nil to the Company for the nine months ended June 30, 2011 and 2010, respectively. The dividend receivable was accounted for as a reduction in equity investments.

During the three months ended June 30, 2011 and 2010, the Company sold goods to Chengdu Winner Likang Medical Appliance Co., Ltd. (“Winner Chengdu”), an equity investee, for US$7,613 and US$2,115 and purchased goods from it for US$22,305 and US$48,912, respectively. During the nine months ended June 30, 2011 and 2010, the Company sold goods to Winner Chengdu, for US$11,458 and US$27,710 and purchased goods from it for US$63,433 and US$66,271, respectively. As of June 30, 2011 and September 30, 2010, amount due to Winner Chengdu were US$61,060 and US$37,975, respectively; and amount due from Winner Chengdu were US$8,243 and US$751, respectively.

The amounts due from/to the above affiliated companies are unsecured, interest free and payable according to the trading credit terms.

Mr. Jianquan Li, the Chief Executive Officer of the Company, entered into agreements with the Company in relation to commodity derivatives trading activities. Under these agreements, as of September 30, 2011, any shortfall between the restricted broker margin account balance maintained for the commodity derivatives trading activities and the balance in that account on January 1, 2011, or US$2,838,000, will be undertaken by Mr. Jianquan Li. The shortfall, if any, will be fully compensated by way of cash payment from Mr. Jianquan Li to the Company on September 30, 2011. The Company accounts for this transaction between the Company and Mr. Jianquan Li in accordance with Staff Accounting Bulletin Topic 5T, under which, any payment due from Mr. Jianquan Li for a shortfall will be recognized to additional paid-in capital on September 30, 2011 upon cash receipt. The gain for the three months ended June 30, 2011 was US$65,037 and loss for the nine months ended June 30, 2011 was US$1,694,632 from trading in commodity financial instruments has been recognized to the consolidated statements of income and comprehensive income.

 
F-10

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
11.
Stock-Based Compensation

Stock-Based Compensation - The Company has adopted FASB ASC 718, Compensation-Stock Compensation, which requires that share-based payment transactions with employees, such as share options, be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period. Compensation expense is recognized for those awards that are expected to vest, which the Company’s estimates based upon historical forfeitures.

In a contract signed on May 8, 2006, the Company agreed to grant to two of its independent directors each year non-qualified options for purchasing up to 10,000 shares of the common stock of the Company, which options shall be exercisable within three years from the grant date and have an exercise price equal to the fair market value on the grant date.  On May 8, 2006, a total of 4,167 non-qualified options were granted and expired on May 7, 2009. On February 6, 2007, a total of 10,000 non-qualified options were granted. On October 1, 2007, the Company and two of its independent directors agreed to increase the cash compensation to them of US$5,000 each, and in order to substitute the option compensation terms agreed in the previous contracts.  The options granted on February 6, 2007 according to the previous contracts were still valid to their expiry date on February 5, 2010.

The Company uses the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options that have no restrictions, are fully transferable and negotiable in a free trading market, to value its options under the independent director’s contract at the grant date.  Use of an option valuation model, as required by FASB ASC 718 “Compensation—Stock Compensation”, includes highly subjective assumptions based on long-term prediction, including the expected stock price volatility and average life of each option grant.

On February 5, 2010, 10,000 non−qualified options expired. There was no stock-based compensation cost recorded for the three and nine months ended June 30, 2011 and 2010, respectively. Instead, the total cash compensation costs for independent directors are US$31,667 and US$28,750 for the three months ended June 30, 2011 and 2010, respectively, US$89,167 and US$76,250 for the nine months ended June 30, 2011 and 2010, respectively.
 
On October 7, 2007, the Board of Directors approved the 2008-09 Restricted Stock Unit Incentive Plan (the “2008-2009 Plan”), a stock incentive compensation program for fiscal years 2008 and 2009. The 2008-2009 Plan allows the Company to offer a variety of restricted stock unit awards to directors, senior management and key employees, where a participant will be eligible to receive one share of the Company’s common stock for each restricted stock unit that vests upon the achievement of corporate and individual objectives and such participant’s continued employment as of the applicable vesting date.

Under the 2008-2009 Plan, the Company granted 500,000 units out of the total 600,000 authorized restricted stock units on October 7, 2007. Entitled employees are eligible to vest the first 50% of the total number of restricted stock awarded on October 7, 2010 and the second 50% on October 7, 2011 if the target of corporate net income attributable to Winner Medical Group Inc.’s annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of October 7, 2007, which was $3.60 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

On October 15, 2008, the Board of Directors approved the granting of the remaining 100,000 units out of the total 600,000 authorized restricted stock units under the 2008-2009 Plan. Entitled employees are eligible to vest the first 50% of the total number of restricted stock awarded on October 7, 2010 and the second 50% on October 7, 2011 if the target of corporate net income attributable to Winner Medical Group Inc., annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of October 15, 2008, which was US$0.50 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

On September 8, 2009, the Board of Directors approved a 2010-11 Restricted Stock Unit Incentive Plan, the “2010-2011 Plan”, a stock incentive compensation program for fiscal years 2010 and 2011. This 2010-2011 plan allows the Company to offer a variety of restricted stock unit awards to directors, senior management and key employees, where a participant will be eligible to receive one share of the Company’s common stock for each restricted stock unit that vests upon the achievement of corporate and individual objectives and such participant’s continued employment as of the applicable vesting date.

Under the 2010-2011 Plan, the Company granted 250,000 units out of the total 300,000 authorized restricted stock units on September 8, 2009. Entitled employees are eligible to vest the first 50% of the total number of restricted stock awarded on September 7, 2012 and the second 50% on September 7, 2013 if the target of corporate net income attributable to Winner Medical Group Inc.’s annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of September 8, 2009, which was $4.40 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

 
F-11

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
11.
Stock-Based Compensation-Continued

On September 28, 2010, the Board of Directors approved the granting of the remaining 50,000 units out of the total 300,000 authorized restricted stock units under the 2010-2011 Plan. Entitled employees are eligible to vest the first 50% of the total number of restricted stock awarded on October 7, 2012 and the second 50% on October 7, 2013 if the target of corporate net income attributable to Winner Medical Group Inc., annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of September 28, 2010, which was US$4.56 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

On July 27, 2009, the Company’s subsidiary in Shenzhen entered into a 5-year consulting agreement with a consulting firm for receiving consulting services of developing strategies on rolling out the Company’s own branded consumer products in China. Pursuant to the agreement, the Company granted 500,000 restricted stock units from the Company’s 2006 Equity Incentive Plan to the consulting firm for the 5-year services. As of September 18, 2010, both parties decided to terminate the co-operation relationship and mutually waived the share-based compensation terms agreed in previous agreement.

On October 6, 2010, the Board of Directors approved the 2011-2013 Restricted Stock Unit Incentive Plan, the "2011-2013 Plan", a stock incentive compensation program for fiscal years 2011 to 2013. This 2011-2013 plan allows the Company to offer a variety of restricted stock unit awards to directors, senior management and key employees of the Company’s wholly-owned subsidiary, Shenzhen PurCotton Technology Co., Ltd. (“Shenzhen PurCotton”). The participant will be eligible to receive one share of the Company’s common stock for each restricted stock unit that vests upon the achievement of corporate and individual objectives and such participant’s continued employment as of the applicable vesting date.

Under the 2011-2013 Plan, the Company granted 300,000 units out of the total 500,000 authorized restricted stock units on October 6, 2010. On each of October 6, 2012, October 6, 2013 and October 6, 2014, a participant will be eligible to vest up to 1/3 of the total number of restricted stock units underlying an award if the target of corporate net income attributable to Winner Medical Group Inc., annual sales objectives, and the participant’s individual performance objectives are fulfilled. The estimated value of award as of grant date is based on the market price of the common stock as quoted on the NASDAQ.com as of October 6, 2010, which was $5.31 per share, and assumes that the individual achieves of the applicable corporate and individual objectives set forth in the award.

On October 7, 2010, under the 2008-2009 Plan, the Company issued 179,507 shares of the Company’s common stock to those entitled employees, representing vesting of the first 50% of the total number of restricted stock awarded.

Pursuant to the one-year investor relations consulting agreement signed between the Company and a capital market consultant firm, 10,000 restricted stock units were granted to the consultant firm on the agreement signature date. After evaluating and assessing the accomplishments were achieved by the consultant firm, 10,000 restricted stock units were vested. The estimated value of the restricted stock units is based on the market price of the common stock as quoted on the NASDAQ.com as of May 2, 2011, which was US$4.99.

The Company recorded stock-based compensation expenses included in selling, general and administrative expenses of US$118,465 and US$235,505 for the three months ended June 30, 2011 and 2010, respectively and US$644,726 and US$782,623 for the nine months ended June 30, 2011 and 2010, respectively.
  
Management considered that the fair value of outstanding restricted share units is approximate to the market value of the Company’s common stock, as at June 30, 2011, the market value of the Company’s common stock is US$4.61.

As of June 30, 2011, a cumulative total of 744,368 non-vested restricted stock units have been cancelled and 179,507 restricted stock units were vested. The total fair value of restricted stock units vested during the three and nine months ended June 30, 2011 was US$Nil and US$536,726, respectively.

 
F-12

 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
11.
Stock-Based Compensation-Continued
 
A summary of the restricted stock units activity is as follows:

   
Incentive plan
on marketing
service
   
2008-09 plan
   
2010-11 plan
   
2011-13 plan
   
Total
   
Weighted
average
grant 
 
   
Number of
units
   
Number of
units
   
Number of
units
   
Number of
units
   
Number of
units
   
date fair
value
 
Nonvested units outstanding at September 30, 2009
    0       524,500       250,000       0       774,500       3.46  
Granted
    500,000       0       50,000       0       550,000       2.87  
Cancelled
    (500,000 )     (45,750 )     (12,750 )     0       (558,500 )     2.76  
Nonvested units outstanding at September 30, 2010
    0       478,750       287,250       0       766,000       3.53  
Granted
    0       0       0       300,000       300,000       5.31  
Cancelled
    0       (67,618 )     (15,750 )     (27,000 )     (110,368 )     3.73  
Vested
    0       (179,507 )     0       0       (179,507 )     2.99  
Nonvested units outstanding at June 30, 2011
    0       231,625       271,500       273,000       776,125       4.31  

As of June 30, 2011, the unrecognized stock-based compensation expense, net of expected forfeitures, for the 2008-2009 Plan, 2010-2011 Plan and 2011-2013 Plan was US$43,542, US$630,602 and US$665,911, respectively, which totaled US$1,340,055, are expected to be amortized over the weighted average period of 1.41 years.

12.
Commitments and Contingencies

Operating leases - The Company was obligated under operating leases requiring minimum rentals as follows:
   
US$
 
Three months ending September 30, 2011
Years ending September 30,
    622,510  
2012
    2,144,361  
2013
    974,098  
2014
    308,493  
On and after 2015
    96,575  
Total minimum lease payments
    4,146,037  

Rental expenses under operating leases included in the consolidated statements of income and comprehensive income were US$647,159 and US$252,879 for the three months ended June 30, 2011 and 2010, respectively. Rental expenses under operating leases for nine months ended June 30, 2011 and 2010, included in the consolidated statement of income and comprehensive income were US$1,664,982 and US$509,288, respectively.

Purchase obligations - The Company has signed agreements with suppliers and other parties to purchase plant and machinery and computer equipment with estimated non-cancelable obligations of US$4,217,699 and US$2,610,641 as of June 30, 2011 and September 30, 2010, respectively.

 
F-13

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
13.
Fair Value Measurement

               FASB ASC 820, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and requires certain disclosures about fair value measurement. FASB ASC 820 also establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:

Level 1 Quoted unadjusted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in market that are not active, and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets.

                Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company.

The financial instruments of the Company are cash and cash equivalents, restricted bank deposits, restricted broker margin account, accounts receivable, deposits and other receivable, other current assets, bank loans, accounts payable, other current liabilities and other liabilities are reasonable estimates of their fair values. These financial assets and liabilities are classified either Level 1 or Level 2 in the fair value hierarchy as of June 30, 2011 and September 30, 2010. Fair value of the amounts due to or from affiliates cannot be readily determined because of the nature of the related party transactions.

14.
Financial Instruments and Derivatives
 
The Company uses financial instruments to manage its exposures to movements in foreign exchange rates and commodity prices. The use of these financial instruments modifies the Company’s exposure to these risks with the goal of reducing the risk of cost to the Company. The Company does not use derivative financial instruments for speculative or trading purposes, nor does it hold or issue leveraged derivative financial instruments.

The following table summarizes the Company’s fair value of derivatives:

   
Condensed Consolidated 
 
June 30,
   
September 30,
 
   
Balance Sheet Presentation
 
2011
   
2010
 
       
US$
   
US$
 
                 
Derivatives not designated as hedging instruments
               
Fair value of foreign exchange forward  contracts
 
Other current assets
    79,560       387,351  
                     
Fair value of foreign exchange forward  contracts
 
Other liabilities
    8,489       174,462  
                     
Fair value of commodity financial instruments
 
Restricted broker margin account
    1,293,172       0  

Foreign exchange derivatives - The Company’s operations are exposed to market risk primarily due to changes in currency exchange rates. In order to manage such risks so as to reduce volatility on earnings and cash flows, the Company enters into several foreign exchange forward contracts with a commercial bank to hedge for future trade receipts in U.S. dollars against RMB. The total outstanding foreign exchange forward contracts were amounted to US$12,600,000, representing US$6,300,000 selling of U.S. dollars and US$6,300,000 buying of U.S. dollars, as of June 30, 2011. The Company’s foreign exchange forward contracts are classified as Level 2 in the fair value hierarchy under FASB ASC 820 since the quote prices of these foreign currency forward contracts can be obtained directly from commercial bank.
 
 
F-14

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
14. 
Financial Instruments and Derivatives- Continued

           The impact on earnings from foreign exchange derivatives activity, including changes in the fair value of derivatives for the three and nine months ended June 30, 2011 and 2010 are as follows:

   
Presentation of gain or loss 
 
Three months ended 
June 30,
 
   
recognized on derivatives
 
2011
   
2010
 
       
US$
   
US$
 
                 
Derivatives not designated as hedging instruments
               
Foreign exchange forward contracts
 
Unrealized exchange gain
    39,611       93,274  
   
Unrealized exchange loss
    (4,946 )     0  
                     
   
Other operating income, net
    34,665       93,274  

 
 
Presentation of gain or loss 
 
Nine months ended 
June 30,
 
   
recognized on derivatives
 
2011
   
2010
 
       
US$
   
US$
 
Derivatives not designated as hedging instruments
               
Foreign exchange forward contracts
 
Unrealized exchange gain
    79,560       158,300  
   
Unrealized exchange loss
    (8,489 )     (60,610 )
                     
   
Other operating income, net
    71,071       97,690  

The realized gain on foreign exchange forward contracts included in other operating income, net was US$Nil in each of the three months ended June 30, 2011 and 2010,  respectively and US$169,040 and US$Nil for the nine months ended June 30, 2011 and 2010, respectively.

 
F-15

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
14.
Financial Instruments and Derivatives- Continued

Commodity derivatives - Cotton is the primary raw material used to manufacture many of the Company’s products and is purchased at market prices. Starting from October 2010, the Company uses commodity financial instruments to manage the risk of cotton purchase cost. Although the commodity financial instruments are economic hedges of specified risks, they are not designated or accounted for as hedging instruments. The commodity financial instruments are valued at fair value. The commodity derivatives require collateral, referred to as margin, in the form of cash. As of June 30, 2011, the Company’s restricted broker margin account was US$1,293,172, net of unrealized loss of US$73,738. Decrease in fair value of commodity financial instruments recorded in other operating income was US$73,738 for the three and nine months ended June 30, 2011. The total outstanding cotton futures contracts amounted to US$3,757,958, representing US$3,757,958 buying of cotton, as of June 30, 2011, which will mature in less than one year. The Company’s commodity financial instruments are classified as Level 1 in the fair value hierarchy under FASB ASC 820 since the quoted unadjusted prices of these commodity financial instruments are available in active markets.

The realized gain for the three months ended June 30, 2011 on commodity financial instruments was US$65,037 and realized loss for the nine months ended June 30, 2011 was US$1,694,632.

15.
Operating Risk

Concentrations of credit risk, major customers and suppliers - A substantial percentage of the Company’s sales are made to one customer, Sakai Shoten Co., Ltd, and are typically sold on an open account basis.  The sales to Sakai Shoten Co., Ltd. accounted for 11.39% and 10.41% of the total net sales for the three months ended June 30, 2011 and 2010, 12.07% and 11.86% of the total net sales for the nine months ended June 30, 2011 and 2010.

A substantial percentage of the Company’s accounts receivable are made of two customers, Tyco Healthcare Co., Ltd and Molnlycke Health Care AB.  The two companies accounted for 10.53% and 14.39%, 14.38% and 13.54% of the total accounts receivable as of June 30, 2011 and September 30, 2010, respectively. The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties being experienced by its major customers. Bad debt recovery of US$31,308 and bad debt expenses of US$80,362 for the three months ended June 30, 2011 and 2010, and bad debt recovery of US$58,841 and bad debt expense of US$67,920 during the nine months ended June 30, 2011 and 2010 respectively.
 
Interest rate risk - The interest rates and terms of repayment of bank and other borrowings ranged from 5.58% to 6.72%.  Other financial assets and liabilities do not have material interest rate risk.

Credit risk - In order to reduce the risk of inability to collect the accounts receivable, the Company entered into an insurance policy with China Export & Credit Insurance Corporation effective on April 15, 2010, will be expired on December 31, 2011 and automatically renewable subject to a one month written notice given by either party. The maximum insurance coverage from China Export & Credit Insurance Corporation is US$2 million.

Foreign currency risk - The value of the Renminbi, the main currency used in the PRC, fluctuates and is affected by, among other things, changes in China's political and economic conditions. In addition, the Renminbi is not readily convertible into US dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China. The conversion of Renminbi into foreign currencies such as the US dollar has been generally based on rates set by the People's Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets. On June 30, 2011 and September 30, 2010, the exchange rates of RMB against US dollar were 6.4716 and 6.7011 respectively; the appreciation of RMB against US dollar was 3.42%. On June 30, 2011 and September 30, 2010, the exchange rates of RMB against Euro were 9.3612 and 9.1329, respectively. This floating exchange rate, and any appreciation of the Renminbi that may result from such rate, could have various adverse effects on the Company’s business.

The Company’s currency exchange rate risks come primarily from the sales of products to international customers. If the RMB appreciates against foreign currencies, it will make the Company’s sale prices more expensive, thus its sales may decline. The Company believes that the exchange rate of RMB against US dollar will remain relatively stable in the short run.

 
F-16

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
16.
Geographical Information

The business of the Company is manufacturing and trading of medical dressings and medical disposable products. The Company's sales by geographic destination are analyzed as follows:
 
   
Three months ended
   
Nine months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
US$
   
US$
   
US$
   
US$
 
         
 
         
 
 
Europe
    16,071,074       12,405,888       35,684,291       31,427,425  
PRC
    9,020,041       5,932,889       25,724,476       19,348,818  
America
    8,556,687       7,203,259       24,794,963       18,110,887  
Japan
    6,201,565       4,216,607       16,834,536       13,645,080  
Others
    1,687,098       1,168,267       5,422,519       4,256,432  
Total net sales
    41,536,465       30,926,910       108,460,785       86,788,642  

Sales to countries which in excess of 10% of total sales for the three and nine months ended June 30, 2011 and 2010:

   
Three months ended
   
Nine months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
US$
   
US$
   
US$
   
US$
 
                         
PRC
    9,020,041       5,932,889       25,724,476       19,348,818  
Japan
    6,201,565       4,216,607       16,834,536       13,645,080  
United States of America
    4,920,077       5,713,134       18,447,279       14,583,591  
Britain
    4,369,665       2,812,210       9,573,037       8,226,356  
 
 
F-17

 
 
WINNER MEDICAL GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
17.
Segment Information

The Company has two reportable segments: medical products (Medical Care, Wound Care, and Home Care)  and PurCotton® products.  The Company’s reportable segments are strategic business units that offer different products and services.  They are managed separately because each business requires different technology and marketing strategies.

Contributions of the major activities and profitability information of the Company’s reportable segments for the three and nine months ended June 30, 2011 and 2010 are as follows:
 
   
Three months ended
 June 30,
 
   
2011
   
2010
 
Net Sales:
 
US$
   
US$
 
Segment:
           
Medical products
    36,177,197       28,343,421  
PurCotton®  products
    5,359,268       2,583,489  
Consolidated total
    41,536,465       30,926,910  
                 
Gross Profits:
               
Segment:
               
Medical products
    9,641,393       8,125,371  
PurCotton®  products
    1,667,216       807,591  
Consolidated total
    11,308,609       8,932,962  
                 
Income from Operations before Taxes:
               
Segment:
               
Medical products
    5,103,391       3,754,887  
PurCotton®  products
    (1,102,819 )     (11,141 )
Consolidated total
    4,000,572       3,743,746  
                 
Net Income Attributable to Winner Medical Group Inc.:
               
Segment:
               
Medical products
    4,315,020       3,386,589  
PurCotton®  products
    (890,495 )     (12,652 )
Consolidated total
    3,424,525       3,373,937  
                 
Depreciation and Amortization:
               
Segment:
               
Medical products
    817,117       898,086  
PurCotton® products
    579,499       455,851  
Consolidated total
    1,396,616       1,353,937  
 
 
F-18

 
 
WINNER MEDICAL GROUP INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
17.
Segment Information-Continued

   
Nine months ended
 June 30,
 
   
2011
   
2010
 
Net Sales:
 
US$
   
US$
 
Segment:
        
 
 
Medical products
    94,548,622       79,788,820  
PurCotton®  products
    13,912,163       6,999,822  
Consolidated total
    108,460,785       86,788,642  
                 
Gross Profits:
               
Segment:
               
Medical products
    25,554,717       23,342,177  
PurCotton®  products
    4,587,111       2,378,817  
Consolidated total
    30,141,828       25,720,994  
                 
Income from Operations before Taxes:
               
Segment:
               
Medical products
    12,247,619       10,745,965  
PurCotton®  products
    (1,927,068 )     705,338  
Consolidated total
    10,320,551       11,451,303  
                 
Net Income Attributable to Winner Medical Group Inc.:
               
Segment:
               
Medical products
    10,387,235       9,358,815  
PurCotton®  products
    (1,398,530 )     612,372  
Consolidated total
    8,988,705       9,971,187  
                 
Depreciation and Amortization:
               
Segment:
               
Medical products
    2,465,766       2,531,044  
PurCotton® products
    1,585,509       1,288,115  
Consolidated total
    4,051,275       3,819,159  
                 
     
June 30,
   
September 30,
 
    2011     2010  
   
US$
   
US$
 
Total Assets:
           
Segment:
               
Medical products
    100,119,101       80,906,150  
PurCotton® products
    47,761,848       38,069,845  
Segment total
    147,880,949       118,975,995  
Reconciliation to consolidated totals:
               
Elimination of other receivable from inter-segments
    (3,283,743 )     0  
Consolidated total
    144,597,206       118,975,995  

18.
Subsequent events
 
On July 1, 2011, the Company issued 10,000 shares to a capital markets consulting firm pursuant to a one-year investor relations consulting agreement between the Company and that firm entered into on May 1, 2010.
 
 
F-19

 
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Special Note Regarding Forward Looking Statements
 
This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of the Company’s management and involve risks and uncertainties, as well as assumptions that, if they ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. The words “believes,” “expects,” “anticipates,” “projects,” “targets,” “optimistic,” “intends,” “aims,” “will” or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors mentioned in the “Risk Factors” section of the Company’s registration statement on Form S-3 and the Company’s annual report on Form 10-K; and any statements of assumptions underlying any of the foregoing. Except as otherwise indicated by the context, references in this report to “the Company,” “Winner,” “Winner Medical,” “we,” “us,” or “our,” are references to the combined business of Winner Medical Group Inc. and its subsidiaries. The English translation of the names of the Company’s subsidiaries which were incorporated in the People’s Republic of China, the “PRC”, is for reference only. The official names of the PRC subsidiaries are in Chinese.
 
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
 
Winner Medical’s business operations consist of the manufacturing and marketing, researching and developing of cotton-based medical dressings and medical disposables, as well as consumer products. The Company has fourteen wholly-owned operating subsidiaries and three joint ventures, all located in the PRC and Hong Kong. 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 State and Japan serving as the top four markets. The Company also sells its PurCotton® jumbo rolls in both China and abroad, and PurCotton® finished consumer products mainly in China.
 
The following analysis discusses changes in the financial condition and results of operations at and for the three and nine months ended June 30, 2011 and 2010, and should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Report.
 
History
 
Winner Medical Group Inc., formerly known as Birch Enterprises, Inc., HDH Industries, Inc. and Las Vegas Resorts Corporation, was originally incorporated in the State of Nevada in August 1986. As of August 10, 2011, the Company’s total outstanding and issued shares were 24,140,247 shares. 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 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.”
 
Business Operations
 
Winner Medical’s present business operations commenced February 1991, and it conducts its manufacture and marketing through its operating subsidiaries located in China. The Company generates revenue through domestic (China) and international sales of a variety of medical dressings and medical disposables, which include medical care, wound care and home care products, such as gauze, wound dressings, disposable drapes, surgical gowns, face masks and cotton balls and PurCotton® jumbo rolls and finished consumer products, which are 100% natural cotton non-woven fabric made products such as dry and wet tissues, facial puffs, baby wears and cleansing wipes.

 
5

 

The Company has integrated manufacturing lines that provide its clients with the ability to procure certain products from a single supplier. In the developed countries where it sells its products, the Company provides its customers with its specialized design, manufacturing and packaging services. When the Company works on this basis, its clients are able to select the design, size, type and scale of the products the Company manufactures for them. The Company sells its own Winner® medical brand products in developing countries and regions including China, the Middle East, South America and Southeast Asia, with distribution channels consisting of local distributors, chain drugstores and direct sales to hospitals, particularly in the China market.
 
The Company promotes its PurCotton® retail products via its own marketing and sales efforts in the China marketplace. In order to build and market the PurCotton® brand in China, the Company established a wholly-owned subsidiary, Shenzhen PurCotton Technology Co., Ltd., “Shenzhen PurCotton” to monitor and centralize the entire retail business in the China market for brand building, marketing, product development and design, packaging and purchasing. In September, November and December 2010, Shenzhen PurCotton established three 100% owned subsidiaries: Beijing PurCotton Co., Ltd., “Beijing PurCotton”, Guangzhou PurCotton Co., Ltd., “Guangzhou PurCotton”, and Shanghai PurCotton Co., Ltd., “Shanghai PurCotton”, respectively. Beijing PurCotton mainly operates and markets distribution channels in northern China, as well as builds and develops its own B2C website. Guangzhou PurCotton and Shanghai PurCotton are responsible for channel development in southern and eastern China. In order to build strong awareness of its high-quality and international brand, the Company believes that Hong Kong will be a good city to launch and promote its PurCotton retail business. Hence, HK PurCotton Ltd., a wholly-owned subsidiary of Shenzhen PurCotton was established in January, 2011. Its product categories contain four types of PurCotton® branded personal products and healthcare supplies. The main distribution channels are presently self-operated chain stores (PurCotton® stores), online sales, supermarkets and bulk sales 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’s net margins may be impacted in the short term, as this is a new business and requires a significant level of start-up investment.
 
Industry Wide Trends Relevant to the Company’s Business
 
The medical dressings and medical disposables manufacturing markets 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 higher quality 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 increase 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 volumes over the next five years will grow in correlation to the growth of medical dressings and medical disposables exports from China.
 
The medical dressings and medical disposables market is subject to consumption patterns and trends. One such trend or consumption pattern relates to the age demographics of the end users of the Company’s products. On average, the worldwide population is aging and life spans are generally increasing. As the general population begins to include a larger percentage of older people, the Company anticipates that more medical care will be required, and that will result in increased sales of the Company’s products.
 
Another industry trend or consumption pattern in the Company’s industry is that hospitals are increasingly looking to reduce their costs. Hospitals reduce costs by seeking alternative products that increase efficiency or reduce labor costs. For example, disposable catheters reduce the need for frequent changes of diapers and bed sheets. Other popular disposables used by hospitals to reduce operating costs include Eustachian tubes and needles, disposable clothing and accessories. The Company believes the demand for cost-effective products and healthcare solutions and an increasing emphasis on health worldwide will bring an increase in the demand for medical instruments, medical dressings and medical disposables.
 
The Company believes that there is a 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 China economy, some foreign multinational companies are entering into the China market to seek suppliers to produce their goods. The Company believes that having more large multinational healthcare companies seeking suppliers to produce their products in China will benefit the Company. In addition, the Company is negotiating with several large healthcare companies 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, over-the-counter 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 sells directly to hospitals in Hong Kong.

 
6

 

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 are composed of petroleum, a non-renewable energy resource. In recent years, cases of 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 strengthen one of its competitive advantages because its new PurCotton® products are primarily made of natural cotton and manufactured in an environmentally-friendly fashion. The Company believes its PurCotton® products will be medium to long-term growth contributor to its revenue, because they can be applied to consumer products as well as to the medical industry.
 
Recent Developments
 
PurCotton Retail Business Updates
 
The Company’s main distribution channels for expanding PurCotton retail business include self-operated stores, online sales and supermarket sales. As of August 10, 2011, the Company operates 37 retail chain stores, with 22 in Guangdong province, where the Company’s headquarters is located, 10 in Beijing, three in Shanghai and two in Hong Kong. From April 1, 2011 to the date of the filing of this Quarterly Report, 3 stores were closed due to unsatisfactory performance. Since launching the customer membership system in the Company’s self-operated stores in China in November 2010, approximately 19,000 customer memberships have been recorded as of August 10, 2011. The Company is selling its PurCotton® products online via Taobao.com and owned Business-to-Consumer (B2C) online store. In addition, the Company recently started launching its products into mid-and-high end supermarkets in Shenzhen. The Company’s PurCotton® products have been receiving positive feedback since launched.
 
Cotton Futures Trading Risk-Transfer Agreements
 
Cotton is the Company’s primary raw material used in its manufacturing process. As a result of rising demand caused by global economic recovery and supply shortages due to bad weather, cotton prices have been rapidly increasing and fluctuating in the last year. Under this rising cost environment, the Company cannot secure stable price quotes from cotton suppliers, resulting in inconsistency in the prices quoted to the Company’s customers. Therefore, the Company, through its wholly-owned subsidiary Winner Industries (Shenzhen) Co., Ltd., “Winner Shenzhen,” has entered into cotton future transactions in order to mitigate the impact of volatility in cotton prices on production. In order to reduce risk from trading, the Company has implemented stringent operational policies and process controls for the futures trading.
 
Due to the high levels of volatility in cotton prices, management determined that cotton futures trading has a high risk which may result in losses to the Company despite management’s efforts to limit such risk. In order to shift risk from the Company during the initial period of cotton futures trading and protect the interests of the Company’s shareholders, the chief executive officer of the Company, Mr. Jianquan Li, signed agreements with Winner Shenzhen effective January 1, 2011 that are scheduled to expire on September 30, 2011. Under these agreements, Mr. Jianquan Li agrees that, on September 30, 2011, he will assume all net losses, if any, incurred by Winner Shenzhen from cotton futures trading from January 1, 2011 to September 30, 2011. If, however, there is a net gain from trading activities, the gain will be retained by Winner Shenzhen. Specifically, if the restricted broker margin account balance on September 30, 2011 is less than the margin deposit as of January 1, 2011 of $2,838,000 (the “Margin Deposit”), any shortfall will be assumed by Mr. Jianquan Li, who will pay Winner Shenzhen an amount equal to such shortfall on September 30, 2011 up to a maximum of the Margin Deposit. Conversely, if the account balance on September 30, 2011 exceeds the Margin Deposit, all gain will be retained by Winner Shenzhen.
 
From January 1, 2011 to June 30, 2011, Winner Shenzhen’s transactions in cotton futures resulted in a net loss of approximately $1,545,000, a shortfall between the restricted broker margin account balance and Margin Deposit, which was the undertaken amount by Mr. Jianquan Li as of June 30, 2011. Since Winner Shenzhen began trading in cotton futures in October 2010, management has made on-going assessments of its trading performance. As a result of the experience gained over this period, the Company has established more stringent trading procedures and policies, as well as risk-reducing strategies for entering into cotton futures transactions, in regular consultation with the board of directors. More details regarding this undertaking by Mr. Jianquan Li were disclosed in the “Recent Development” section of the Company’s Quarterly Report on Form 10-Q for the three-month period ended March 31, 2011 as filed with the Securities and Exchange Commission.
 
Results of Operations
 
Comparison for the Three Months Ended June 30, 2011 and 2010
 
The following sets forth the Company’s income statement information for the three months ended June 30, 2011 and 2010.

 
7

 
 
Comparison of the Three Months Ended June 30, 2011 and 2010
(All amounts, other than percentages, in thousands of U.S. Dollars)
 
   
THREE MONTHS
   
THREE MONTHS
             
   
ENDED 6/30/11
   
ENDED 6/30/10
             
   
In
   
As a
   
In
   
As a
   
Amount
       
Item
 
Thousands
   
Percentage
   
Thousands
   
Percentage
   
Change
   
% Change
 
Net Sales
  $ 41,536       100.00 %   $ 30,927       100.00 %   $ 10,609       34.30 %
Cost of Sales
  $ 30,228       72.78 %   $ 21,994       71.12 %   $ 8,234       37.44 %
Gross Profit
  $ 11,309       27.23 %   $ 8,933       28.88 %   $ 2,376       26.60 %
Other Operating Income/(Loss), Net
  $ (3 )     (0.01 )%   $ 117       0.38 %   $ (120 )     (102.56 )%
Government Subsidies
  $ 90       0.22 %   $ 28       0.09 %   $ 62       221.43 %
Realized Gain on Commodity Financial Instruments
  $ 65       0.16 %   $ -       -     $ 65       -  
Exchange Difference, Net
  $ 271       0.65 %   $ 153       0.49 %   $ 118       77.12 %