Universe Pharmaceuticals INC 6-K, filed Aug 16, 2022
Universe Pharmaceuticals INC (UPC)
About this 6-K
Universe Pharmaceuticals INC filed this 6-K on August 16, 2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of August 2022
Commission file number:
265 Jingjiu Avenue
Jinggangshan Economic and Technological Development Zone
Ji’an, Jiangxi, China 343100
+86-0796-8403309
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
Explanatory Note
Universe Pharmaceuticals INC (the “Registrant”) is filing this current report on Form 6-K to report its financial results for the six months ended August 16, 2022 and to discuss its recent corporate developments.
Attached as exhibits to this current report on Form 6-K are:
| (1) | the unaudited condensed interim consolidated financial statements and related notes as Exhibit 99.1; | |
| (2) | Management’s Discussion and Analysis of Financial Condition and Results of Operations as Exhibit 99.2; | |
| (3) | a press release dated August 12, 2022, titled “Universe Pharmaceuticals INC Reports Financial Results for The First Six Months of Fiscal Year 2022” as Exhibit 99.3; and | |
| (4) | Interactive Data File disclosure as Exhibit 101 in accordance with Rule 405 of Regulation S-T. |
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this current report with respect to the Company’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of the Company. Forward-looking statements include, but are not limited to, those statements using words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,” “intend,” “seek,” “may,” “might,” “could” or “should,” and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management’s assumptions, judgments and beliefs in light of the information currently available to it. The Company cautions investors that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, including but not limited to, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition and pricing, government regulation, and other risks contained in reports filed by the company with the U.S. Securities and Exchange Commission. Therefore, investors should not place undue reliance on such forward-looking statements. Actual results may differ significantly from those set forth in the forward-looking statements.
All such forward-looking statements, whether written or oral, and whether made by or on behalf of the company, are expressly qualified by the cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, the company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.
2
EXHIBIT INDEX
|
Exhibit No. |
Description | |
| 99.1 | Unaudited Consolidated Financial Statements and Related Notes As of March 31, 2022 and for the Six Months Ended March 31, 2022 and 2021 | |
| 99.2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| 99.3 | Press Release – Universe Pharmaceuticals INC Reports Fiscal Year 2021 Financial Results | |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
3
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Universe Pharmaceuticals INC. | ||
| Date: August 16, 2022 | By: | /s/ Gang Lai |
| Gang Lai | ||
| Chief Executive Officer | ||
4
Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
F-1
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | ||||||||
| March 31, | September 30 | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Due from related parties | ||||||||
| Advance to suppliers | ||||||||
| Prepayment for advertising | - | |||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | ||||||||
| Prepayments made to a related party for purchase of property | ||||||||
| Prepayments for construction in progress | ||||||||
| Intangible assets, net | ||||||||
| Investment in equity securities | ||||||||
| Deferred tax assets | ||||||||
| TOTAL NONCURRENT ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term bank loans | $ | $ | ||||||
| Accounts payable | ||||||||
| Taxes payable | ||||||||
| Due to related parties | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares, $ | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserves | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUE | $ | $ | ||||||
| COST OF REVENUE AND RELATED TAX | | | ||||||
| GROSS PROFIT | | | ||||||
| OPERATING EXPENSES | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Total operating expenses | | |||||||
| INCOME FROM OPERATIONS | | | ||||||
| OTHER INCOME (EXPENSES) | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Other income (expense), net | ( | ) | ||||||
| Short-term investment income | ||||||||
| Equity investment income | - | | ||||||
| Total other income (expense), net | | ( | ) | |||||
| INCOME BEFORE INCOME TAX PROVISION | ||||||||
| PROVISION FOR INCOME TAXES | ||||||||
| NET INCOME | | | ||||||
| OTHER COMPREHENSIVE INCOME | ||||||||
| Foreign currency translation adjustment | | | ||||||
| COMPREHENSIVE INCOME | $ | $ | ||||||
| Earnings per common share - basic and diluted | $ | $ | ||||||
| Weighted average shares - basic and diluted | $ | | $ | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-3
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||
| Common Stock | Paid in | Subscription | Statutory | Retained | Comprehensive | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Reserve | Earnings | Income | Total | |||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Issuance of ordinary shares in initial public offerings, net | ||||||||||||||||||||||||||||||||
| Issuance of additional shares under over allotment option in initial public offerings, net | ( | ) | ||||||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Loss from disposal of fixed assets | ||||||||
| Changes in allowance for doubtful accounts | ( | ) | ||||||
| Changes in inventory reserve | ( | ) | ( | ) | ||||
| Deferred income tax provision (benefit) | ( | ) | ||||||
| Short-term investment income | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Advance to suppliers, net | ||||||||
| Prepayment for advertising | ||||||||
| Advances to related parties | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Taxes payable | ( | ) | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term bank loans | ||||||||
| Repayment of bank loans | ( | ) | ( | ) | ||||
| Net proceeds from initial public offerings | - | |||||||
| Proceeds from (repayment of) related party borrowings | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of changes of foreign exchange rates on cash | ||||||||
| Net increase in cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental non-cash financing activity: | ||||||||
| Subscription receivable from issuance of ordinary shares under initial public offerings | $ | $ | ||||||
| Cost of construction in progress paid in prior years | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-5
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BUSINESS DESCRIPTION
Universe Pharmaceuticals Inc. (“Universe INC” or the “Company”) was incorporated under the laws of the Cayman Islands on December 11, 2019 as an exempted company with limited liability.
Universe
INC. owns
Jiangxi
Universe Pharmaceuticals Technology Co., Ltd. (“Universe Technology”) was formed on April 8, 2019, as a Wholly Foreign-Owned
Enterprise (“WFOE”) in the People’s Republic of China (“PRC” or “China”). The registered
capital of Universe Technology is approximately $
Universe INC, Universe HK and Universe Technology are currently not engaging in any active business operations and are merely acting as holding companies.
Jiangxi
Universe Pharmaceuticals Co., Ltd.
Reorganization
A
reorganization of our legal structure (“Reorganization”) was completed on December 11, 2019. The Reorganization involved
the incorporation of Universe INC and Universe Technology, and the transfer of the
The Reorganization has been accounted for as a recapitalization among entities under common control, since the same controlling shareholders controlled all these entities before and after the Reorganization. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying unaudited condensed consolidated financial statements. Results of operations for the periods presented comprise those of the previously separate entities combined from the beginning of the period to the end of the period, eliminating the effects of intra-entity transactions.
On
March 25, 2021, the Company closed its initial public offering (the “IPO”) of
On May 12, 2021, through the Company’s PRC subsidiary, Jiangxi Universe, the Company established a wholly controlled subsidiary, Guangzhou Universe Hanhe Medical Research Co., Ltd. (“Universe Hanhe”) in Guangzhou City, China, for the business purpose of conducting research and development of new pharmaceutical products in order to diversify the Company’s product offerings in the near future. As of March 31, 2022 and as of the date of this report, Universe Hanhe has no active business operations.
F-6
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BUSINESS DESCRIPTION (continued)
Details of the subsidiaries of the Company as of March 31, 2022 are set out below:
| Name of Entity | Date
of Incorporation |
Place
of Incorporation |
%
of Ownership |
Principal Activities | ||||
| Universe INC | Parent, |
|||||||
| Universe HK | ||||||||
| Universe Technology | ||||||||
| Jiangxi Universe | ||||||||
| Universe Trade | ||||||||
| Universe Hanhe |
The Company, through its wholly-owned subsidiaries, is primarily engaged in the development, manufacturing and sale of traditional Chinese medicines derivatives (“TCMD”) products targeted to the elderly to address their physical conditions in the aging process and to promote their general well-being. In addition, the Company also sells biochemical drugs, medical instruments, traditional Chinese medicine pieces products and dietary supplements (collectively “third-party products”). All of these TCMD and third-party products are currently sold to customers including pharmaceutical companies, hospitals, clinics and drugstore chains throughout China.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The accompanying unaudited condensed consolidated financial statements include the financial statements of Universe INC, Universe HK, Universe Technology, Jiangxi Universe, Universe Trade and Universe Hanhe. All inter-company balances and transactions are eliminated upon consolidation.
Uses of estimates
In preparing the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the unaudited condensed consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for estimated uncollectible receivables, the realizability of advance to suppliers, inventory valuations, useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities, revenue recognition and realization of deferred tax assets. Actual results could differ from those estimates.
F-7
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks and Uncertainties
The main operation of the Company is located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note 1, this may not be indicative of future results.
The development and commercialization of new pharmaceutical products is highly competitive, and the industry currently is characterized by rapidly changing technologies, significant competition and a strong emphasis on intellectual property. The Company may face competition with respect to its current and future pharmaceutical product candidates from major pharmaceutical companies in China.
The Company’s business, financial condition and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, which could significantly disrupt the Company’s operations.
The
Company’s operations may be further affected by the ongoing COVID-19 pandemic. Due
to the resurgence of COVID-19 pandemic in China in 2022, there had been delays in purchase of raw material supplies and deliver products
to the customers of the PRC operating entities on a timely basis as a consequence of the travel restrictions. The prices of the raw materials
also increased by about
F-8
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash
Cash includes currency on hand and deposits held by banks that can be added or withdrawn without limitation. The Company maintains most of its bank accounts in the PRC. Cash balances in bank accounts in the PRC are not insured by the Federal Deposit Insurance Corporation or other programs.
Accounts receivable, net
Accounts
receivable are presented net of allowance for doubtful accounts. The Company determines the adequacy of reserves for doubtful accounts
based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when
there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best
estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. Actual amounts received
may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off
against the allowance for doubtful accounts after management has determined that collection is not probable. Allowance for uncollectable
balances amounted to $
Inventories, net
Inventories
are stated at net realizable value using weighted average method. Costs include the cost of raw materials, freight, direct labor and
related production overhead. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision
for diminution in the value of inventories. Net realizable value is the estimated selling price in the normal course of business less
any costs to complete and sell products. The Company evaluates inventories on a quarterly basis for its net realizable value adjustments,
and reduces the carrying value of those inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable
value based on various factors including aging, expiration dates, as applicable, taking into consideration historical and expected future
product sales. The Company recorded inventory reserve of $
Advances to suppliers, net
Advances to suppliers represent prepayments made to ensure continuous high-quality supplies and favorable purchase prices for raw materials. These advances are directly related to the purchases of raw materials used to fulfill sales orders. The Company is required from time to time to make cash advances when placing its purchase orders. These advances are settled upon suppliers delivering raw materials to the Company when the transfer of ownership occurs. The Company reviews its advances to suppliers on a periodic basis and makes general and specific allowances when there is doubt as to the ability of a supplier to provide supplies to the Company or refund an advance. As of March 31, 2022 and September 30, 2021, no allowance for doubtful accounts was deemed necessary, as the Company believes that all advances to suppliers are fully realizable.
Deferred initial public offering (“IPO”) costs
The Company complies with the requirement of the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A — “Expenses of Offering”. Deferred offering costs consist of underwriting, legal, accounting and other expenses incurred through the balance sheet date that are directly related to the intended IPO. Deferred offering costs were charged to shareholders’ equity upon the completion of the IPO on March 25, 2021.
F-9
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Short-term investments
The Company’s short-term investments consist of wealth management financial products purchased from a financial institution, which can be redeemed anytime. The financial institution invests the Company’s fund in certain financial instruments including money market funds and bonds to generate investment income. The short-term investments are deemed to be trading securities and are measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for investment are included in the unaudited condensed consolidated statements of operations and comprehensive income over the investment period (see Note 7).
Fair value of financial instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data. |
| ● | Level 3 — inputs to the valuation methodology are unobservable. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash, accounts receivable, inventories, short-term investments, advances to suppliers, prepaid expenses and other current assets, accounts payable, short-term bank loans, accrued expenses and other current liabilities, taxes payable and due to related parties, approximate the fair value of the respective assets and liabilities as of March 31, 2022 and September 30, 2021 based upon the short-term nature of the assets and liabilities. The Company’s investment in equity securities is accounted for using the measurement alternative in accordance with ASC 321, which also approximate its recorded value.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is provided using the straight-line method over their expected useful lives, as follows:
| Useful life | ||
| Buildings | ||
| Machinery and equipment | ||
| Automobiles | ||
| Office and electric equipment |
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the unaudited condensed consolidated statements of income and other comprehensive income in other income or expenses.
F-10
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, plant and equipment (continued)
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment were recorded in operating expenses for the six months ended March 31, 2022 and 2021, respectively.
Intangible Assets
Intangible assets consist primarily of land use rights and software. Under the PRC law, all land in the PRC is owned by the government and cannot be sold to an individual or company. The government grants individuals and companies the right to use parcels of land for specified periods of time. Land use rights are stated at cost less accumulated amortization. Intangible assets are amortized using the straight-line method with the following estimated useful lives:
| Useful life | ||
| Land use rights | ||
| Software |
The Company reviews the carrying value of land use rights for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment of land use rights was deemed necessary for the six months ended March 31, 2022 and 2021, respectively.
Construction-in-Progress (“CIP”)
CIP represents property and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable to the construction. CIP is not depreciated. Upon completion and ready for intended use, CIP is reclassified to the appropriate category within property, plant and equipment.
Impairment of long-lived Assets
Long-lived assets with finite lives, primarily property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated undiscounted cash flows from the use of the asset and its eventual disposition below are the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets as of March 31, 2022 and September 30, 2021.
F-11
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments in Equity Securities
The
Company accounts for its equity investments in accordance with Accounting Standards Codification (“ASC”) 321 “Investments—Equity
Securities” (“ASC 321”). In accordance with ASC 321, equity investment which the Company has no significant influence
(generally less than a
From
March 2009 to September 2017, the Company invested approximately $
The
Company initially recorded the investments at historical cost and subsequently records any dividends received from the net accumulated
earnings of the investee as income. As of March 31, 2022 and September 30, 2021, this investment amounted to $
The investments in equity securities are evaluated for impairment when facts or circumstances indicate that the fair value of the investment is less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near-term prospects of the investments; and (v) ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. There was no impairment for the Company’s investments in equity securities as of March 31, 2022 and September 30, 2021.
Revenue recognition
To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.
The Company recognizes revenue when it transfers its goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. The Company accounts for the revenue generated from sales of its TCMD and third-party products on a gross basis, as the Company is acting as a principal in these transactions, is subject to inventory risk, has latitude in establishing prices, and is responsible for fulfilling the promise to provide customers the specified goods, which the Company has control of the goods and has the ability to direct the use of goods to obtain substantially all the benefits. All of the Company’s contracts have one single performance obligation, namely, the promise is to transfer the individual goods to customers, and there is no separately identifiable other promise in the contracts. The Company’s revenue streams are recognized at a point in time when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company’s products are sold with no right of return and the Company does not provide other credits or sales incentive to customers. Revenue is reported net of all value added taxes (“VAT”).
F-12
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Contract Assets and Liabilities
Payment terms are established on the Company’s pre-established credit requirements based upon an evaluation of customers’ credit quality. Contract assets are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing when an order is placed and when shipment or delivery occurs. As of March 31, 2022 and September 30, 2021, the Company did not have contract assets and contract liabilities.
Disaggregation of Revenues
The Company disaggregates its revenue from contracts by product types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the six months ended March 31, 2022 and 2021 are disclosed in Note 17 of these unaudited condensed consolidated financial statements.
Cost of revenue
Cost of revenue consists primarily of the costs of raw materials, freight charges, direct labor, depreciation of plants and machinery, warehousing and overhead associated with the manufacturing process.
Research and development expenses
The
Company expenses all internal research and development costs as incurred, which primarily comprise employee costs, internal and external
costs related to execution of studies, including manufacturing costs, facility costs of the research center, and amortization and depreciation
to intangible assets and property, plant and equipment used in the research and development activities. For the six
months ended March 31, 2022 and 2021, total research and development expense were approximately
$
Shipping and handling costs
Shipping and handling costs are expensed as incurred. Inbound shipping and handling cost associated with bringing the purchased raw materials and third-party products from suppliers to the Company’s warehouse are included in cost of revenue. Outbound shipping and handling costs associated with shipping and delivery the products to customers are included in selling expenses.
Advertising expense
Advertising
expenses primarily relate to promotion of the Company’s brand name and products through outdoor billboards, social media such as
Weibo and WeChat, and TV advertisement. Advertising costs is expensed as incurred or deferred and then expensed the first time the advertising
takes place. Advertising expenses are included in selling expenses in the unaudited condensed consolidated statements of income and comprehensive
income. Advertising expenses amounted to $
Segment Reporting
The Company uses the management approach in determining reportable operating segments. The management approach considers the internal reporting used by the Company’s chief operating decision maker for making operating decisions about the allocation of resources of the segment and the assessment of its performance in determining the Company’s reportable operating segments. Management has determined that the Company has one operating segment (See Note 18).
F-13
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the unaudited condensed consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the six months ended March 31, 2022 and 2021. The Company does not believe there was any uncertain tax provision at March 31, 2022 and September 30, 2021.
The Company’s operating subsidiary in China is subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the six months ended March 31, 2022 and 2021. As of March 31, 2022, all of the tax returns of the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.
Value added tax (“VAT”)
Sales
revenue represents the invoiced value of goods, net of VAT. The VAT is based on gross sales price and VAT rates range up to
Earnings per Share
The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the six months ended March 31, 2022 and 2021, there were no dilutive shares.
F-14
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translation
The functional currency for Universe INC is the U.S Dollar (“US$”). Universe HK uses Hong Kong dollar as its functional currency. However, Universe INC and Universe HK currently only serve as holding companies and did not have active operations as of the date of this report. The Company operates only in the PRC and the Company’s functional currency is the Chinese Yuan (“RMB”). The Company’s unaudited condensed consolidated financial statements have been translated into the reporting currency US$.
Assets and liabilities of the Company are translated at the exchange rate at each reporting period end date. Equity is translated at historical rates. Income and expense accounts are translated at the average rate of exchange during the reporting period. The resulting translation adjustments are reported under other comprehensive income. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
The following table outlines the currency exchange rates that were used in creating the unaudited condensed consolidated financial statements in this report:
| For
the Six Months Ended March 31, |
For the Year Ended September 30, | |||||
| 2022 | 2021 | 2021 | ||||
| Period/Year-end spot rate | ||||||
| Average rate | ||||||
Comprehensive income
Comprehensive income consists of two components, net income and other comprehensive income. The foreign currency translation gain resulting from translation of the financial statements expressed in RMB to US$ is reported in other comprehensive income in the unaudited condensed consolidated statements of income and comprehensive income.
Statement of Cash Flows
In accordance with ASC 230, “Statement of Cash Flows”, cash flows from the Company’s operations are formulated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
Employee Defined Contribution Plan
The
Company’s subsidiaries in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which
pension, work-related injury benefits, maternity insurance, medical insurance, unemployment benefit and housing fund are provided to
eligible full-time employees. The relevant labor regulations require the Company’s subsidiaries in the PRC to pay the local labor
and social welfare authorities monthly contributions based on the applicable benchmarks and rates stipulated by the local government.
The contributions to the plan are expensed as incurred. Employee social security and welfare benefits included as expenses in the accompanying
statements of income and comprehensive income amounted to $
F-15
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
Recent Adopted Accounting Pronouncements
In August 2018, the FASB Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for all entities for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures were adopted on a retrospective basis and the new disclosures were adopted on a prospective basis. The adoption of this guidance had no material impact on the Company’s unaudited condensed consolidated financial statements.
Recent Accounting Pronouncements not yet adopted
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The new guidance requires the lessee to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. In July 2018, FASB issued ASU 2018-11 Leases (Topic 842) – Targeted Improvements that reduces costs and eases implementation of the leases standard for financial statement preparers. The ASU simplifies transition requirements and, for lessors, provides a practical expedient for the separation of non-lease components from lease components. ASU 2016-02 was further amended in November 2019 by ASU 2019-10 and in June 2020 by ASU 2020-05, which deferred the effective date of new lease standard. As a result, ASC 842, Leases, is effective for public companies for annual reporting periods and interim periods within those years beginning after December 15, 2018. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. As an emerging growth company, the Company elects to apply for the new and revised accounting standards at the effective date for a private company and to adopt this guidance effective October 1, 2021. The Company is currently evaluating the impact of adopting this standard on its unaudited condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. In November 2019, the FASB issued ASU 2019-10, which extends the effective date for adoption of ASU 2016-13. In November 2019, the FASB issued ASU 2019-11 to clarify its new credit impairment guidance in ASU 326. Accordingly, for public entities that are not smaller reporting entities, ASU 2016-13 and its amendments is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an emerging growth company, the Company plans to adopt this guidance effective October 1, 2023. The Company is currently evaluating the impact of its pending adoption of ASU 2016-13 on its unaudited condensed consolidated financial statements.
F-16
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements (continued)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, which is fiscal 2021 for us, with early adoption permitted. The Company does not expect adoption of the new guidance to have a significant impact on our financial statements.
In February 2020, the FASB issued ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (topic 842) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (topic 842)”. This ASU provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. This ASU is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. The Company is evaluating the impact of this guidance on its unaudited condensed consolidated financial statements.
NOTE 3 — ACCOUNTS RECEIVABLE, NET
Accounts receivable consists of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
The Company’s accounts receivable primarily includes the balance due from customers when the Company’s pharmaceutical products are sold and delivered to customers. As of date of this report, approximately 97.5% of the Company’s accounts receivable balance at September 30, 2021 has been collected. As of date of this report, approximately 64.9%, or $12.2 million, of the Company’s net account receivable balance at March 31, 2022 has been subsequently collected and the remaining balance is expected to be substantially collected before September 30, 2022.
The following table summarizes the Company’s accounts receivable and subsequent collection by aging bucket:
Accounts Receivable by aging bucket |
Balance
as of March 31, 2022 |
Subsequent
collection |
%
of subsequent collection |
|||||||||
| Less than 3 months | $ | $ | % | |||||||||
| From 4 to 6 months | % | |||||||||||
| From 7 to 9 months | % | |||||||||||
| From 10 to 12 months | % | |||||||||||
| Over 1 year | % | |||||||||||
| Total gross accounts receivable | % | |||||||||||
| Allowance for doubtful accounts | ( |
) | - | |||||||||
| Accounts Receivable, net | $ | $ | % | |||||||||
F-17
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — ACCOUNTS RECEIVABLE, NET (continued)
Allowance for doubtful accounts movement is as follows:
| March 31, 2022 | September 30, 2021 | |||||||
| Beginning balance | $ | $ | ||||||
| Additions | ||||||||
| Bad debt recovery | ( | ) | ||||||
| Foreign currency translation adjustments | ||||||||
| Ending balance | $ | $ | ||||||
NOTE 4 — INVENTORY, NET
Inventory consists of the following:
| March 31, 2022 | September 30,
| |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Inventory valuation allowance | ( | ) | ( | ) | ||||
| Total inventory, net | $ | $ | ||||||
Impairment
of inventories is recorded in cost of goods sold. For the six months ended March 31, 2022 and 2021, recovery of previously accrued inventory
allowance amounted to $
NOTE 5 — ADVANCE TO SUPPLIERS
Advances to suppliers consist of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Advances to suppliers for inventory raw material purchase | $ | $ | ||||||
| Less: allowance for doubtful accounts | ||||||||
| Advances to suppliers | $ | $ | ||||||
Advances to suppliers represent prepayments made to suppliers to ensure continuous high-quality supplies and favorable purchase prices for raw materials. During 2021, due to supply chain disruption caused by COVID-19, the market price for raw materials continued to increase. In order to ensure sufficient raw materials for production and lock in favorable purchase prices, the Company made advance payments to suppliers.
F-18
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — PREPAYMENT FOR ADVERTISTING
On
September 6, 2021, the Company entered into an advertising service agreement with third-party, Guangdong Fengyang Legend Consulting Co.,
Ltd. (“Fengyang Legend”), pursuant to which, Fengyang Legend will assist the Company to develop and produce TV advertising
film for the Company in order to promote the Company’s sales of its major TCMD product, Bainian Pill and Guben Yanling Pill, and
coordinate the specific TV Channel to broadcast the advertising film to targeted geographic market areas. The total contracted advertising
service fee is RMB
NOTE 7 — SHORT-TERM INVESTMENTS
The Company’s short-term investments consist of wealth management financial products purchased from financial institution, which can be redeemed anytime at the Company’s discretion. The financial institution invests the Company’s fund in certain financial instruments including money market funds and bonds to generate investment income. Short-term investments consisted of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Beginning balance | $ | $ | ||||||
| Add: purchase wealth management financial products | ||||||||
| Less: redemption | ( | ) | ||||||
| Accrued investment income | ||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Ending balance of short-term investments | $ | $ | ||||||
Investment
income generated from such short-term investments amounted to $
F-19
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consists of the following:
| Useful life | March 31, 2022 | September 30, | ||||||||
| Buildings | $ | $ | ||||||||
| Machinery and equipment | ||||||||||
| Automobiles | ||||||||||
| Office and electric equipment | ||||||||||
| Construction in progress | ||||||||||
| Subtotal | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
Depreciation
expense was $
NOTE 9 — INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
| Useful life | March 31, 2022 | September 30,
| ||||||||
| Land use rights | $ | $ | ||||||||
| Software | ||||||||||
| Total | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangible assets, net | $ | $ | ||||||||
Amortization
expense was $
Estimated future amortization expense for intangible assets is as follows:
| Twelve months ending March 31, | Amortization expense | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ | ||||
F-20
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — PREPAYMENT FOR CIP PROJECT
CIP
represents direct costs of construction incurred for the Company’s manufacturing facilities. On June 25, 2021, the Company signed
a construction sub-contract with sub-contractor Jiangxi Chenyuan Construction Project Co., Ltd. (“Chenyuan”), pursuant to
which, Chenyuan will help the Company construct four manufacturing plant buildings and an office building with a total estimated budget
of RMB
As
of March 31, 2022, $
As
of March 31, 2022, future additional capital expenditure on this CIP project is estimated to be approximately RMB
As of March 31, 2022, future minimum capital expenditures on the Company’s CIP project are estimated as follows:
| Fiscal Years ending September 30, | Capital on CIP | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total | $ | |||
F-21
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — PREPAYMENT FOR PURCHASE OF A PROPERTY
On
May 6, 2021, the Company entered into a real estate property purchase agreement with related party Jiangxi Yueshang Investment Co., Ltd.
(“Jiangxi Yueshang”), an entity in which the Company’s chief executive officer, Mr. Gang Lai, owned
As
of March 31, 2022, the Company had made a prepayment of RMB
NOTE 12 — SHORT-TERM BANK LOANS
Short-term bank loans consist of the following:
| Note | March 31, 2022 | September 30, 2021 | ||||||||
| Short-term bank loans: | ||||||||||
| Maturity date on June 15, 2022, interest rate 4.81% per annum | (1) | |||||||||
| Maturity date on June 30, 2022, interest rate 4.5% per annum | (2) | |||||||||
| Maturity date on March 17, 2022, interest rate 4.81% per annum | ||||||||||
| Maturity date on March 13, 2023, interest rate 4.62% per annum | (3) | |||||||||
| Total short-term bank loans | $ | $ | ||||||||
| (1) |
| (2) |
| (3) |
For
the above-mentioned loans, the Company recorded a total interest expense of $
F-22
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — RELATED PARTY TRANSACTIONS
| (a) | Nature of relationships with related parties |
| Name | Relationship with the Company | |
| Mr. Gang Lai | ||
| Ms. Lin Yang | ||
| Greatest Group (China) Financial Management Limited (“Greatest Group”) | ||
| Foshan Shangyu Investment Holding Co., Ltd (“Foshan Shangyu”) |
| (b) | Due from related parties |
| Name | March 31, 2022 | September 30, 2021 | ||||||
| Greatest Group | $ | $ | ||||||
| Foshan Shangyu | ||||||||
| Total due from related parties | $ | $ | ||||||
The Company’s due from related parties were interest free and due on demand.
| (c) | Due to related parties |
| Name | March 31, 2022 | September 30, 2021 | ||||||
| Mr. Gang Lai | $ | $ | - | |||||
| Mrs. Lin Yang | - | |||||||
| Total due to related parties | $ | $ | ||||||
As of March 31, 2022 and September 30, 2021, due to related parties mainly consisted of advances from related parties for working capital purposes during the Company’s normal course of business. These advances are non-interest bearing and due on demand.
| (d) | Loan guarantee provided by related parties |
In connection with the Company’s bank borrowings from Bank of Communications, certain related parties of the Company, including Mr. Gang Lai, the Company’s controlling shareholder, Mr. Gang Lai’s spouse, Ms. Xing Wu, and the Company’s subsidiary, Universe Trade, jointly signed guarantee agreements with Bank of Communications to provide credit guarantee for this loan.
In connection with the Company’s bank borrowings from LRC Bank, the Company’s chief executive officer, Mr. Gang Lai, signed a guarantee agreement with LRC Bank to provide a credit guarantee for the Company’s loans from LRC Bank within the loan period (see Note 12).
F-23
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — RELATED PARTY TRANSACTIONS (continued)
| (e) | Prepayment to related party for property purchase |
NOTE 14 — TAXES
| (a) | Corporate Income Taxes (“CIT”) |
Cayman Islands
Under the current tax laws of the Cayman Islands, Universe INC is not subject to tax on its income or capital gains. In addition, no Cayman Islands withholding tax will be imposed upon the payment of dividends by the Company to its shareholders.
Hong Kong
Universe
HK is incorporated in Hong Kong and is subject to profit taxes in Hong Kong at a rate of
PRC
Under
the Enterprise Income Tax (“EIT”) Law of PRC, domestic enterprises and Foreign Investment Enterprises (“FIEs”)
are usually subject to a unified
F-24
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 — TAXES (continued)
The components of the income tax provision (benefit) are as follows:
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Current tax provision | ||||||||
| Cayman | $ | $ | ||||||
| Hong Kong | ||||||||
| PRC | ||||||||
| Subtotal | $ | $ | ||||||
| Deferred tax provision (benefit) | ||||||||
| Cayman | $ | $ | ||||||
| Hong Kong | ||||||||
| PRC | ( | ) | ||||||
| Total income tax provision | $ | $ | ||||||
The following table reconciles the China statutory rates to the Company’s effective tax rate for the six months ended March 31, 2022 and 2021:
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Statutory PRC income tax rate | % | % | ||||||
| Effect of income tax holiday | % | ( | )% | |||||
| Permanent difference | % | % | ||||||
| Non-PRC entities not subject to PRC income tax | ( | )% | % | |||||
| Impact on DTA due to change in applicable income tax rate | ( | )% | % | |||||
| Change in valuation allowance | % | % | ||||||
| Total | % | % | ||||||
The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. As of March 31, 2022, all of the Company’s tax returns of its PRC subsidiaries remain open for statutory examination by PRC tax authorities.
Deferred tax assets are composed of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry-forwards | $ | $ | ||||||
| Allowance for doubtful accounts | ||||||||
| Total | ||||||||
| Valuation allowance | ||||||||
| Total deferred tax assets | $ | $ | ||||||
F-25
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 — TAXES (continued)
The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. Management considers new evidence, both positive and negative, that could affect the Company’s future realization of deferred tax assets including its recent cumulative earnings experience, expectation of future income, the carry forward periods available for tax reporting purposes and other relevant factors. Although Jiangxi Universe incurred a net loss during the six months ended March 31, 2022, the Company determined that it is more likely than not that its deferred tax assets could be realized due to the estimated future earnings in Jiangxi Universe.
| (b) | Taxes payable |
Taxes payable consist of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Income tax payable | $ | $ | ||||||
| Value added tax payable | ||||||||
| Other taxes payable | ||||||||
| Total taxes payable | $ | $ | ||||||
NOTE 15 — CONCENTRATIONS
A majority of the Company’s revenue and expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
As
of March 31, 2022 and September 30, 2021, $
For
the six months ended March 31, 2022 and 2021, no single customer accounted for more than
Sales
of one of the Company’s major products, Guben Yanling Pill, accounted for
As
of March 31, 2022 and September 30, 2021, no customer accounted for more than
As
of March 31, 2022, two suppliers accounted for
For
the six months ended March 31, 2022, no supplier accounted for more than
F-26
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 — SHAREHOLDERS’ EQUITY
Ordinary Shares
Universe
INC was incorporated under the laws of the Cayman Islands on December 11, 2019. The original authorized number of ordinary shares was
Initial Public Offering
On
March 25, 2021, the Company closed its IPO of
As
of March 31, 2022 and September 30, 2021, the Company had total of
Underwriter warrants
In
connection with the Company’s IPO, the Company also agreed to issue warrants to the underwriter, for a nominal consideration of
$
Cash dividends
On
September 21, 2016, September 13, 2017, February 2, 2018, September 20, 2018 and February 21, 2019, the board of directors of Jiangxi
Universe approved resolutions to pay cash dividends of RMB
F-27
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 — SHAREHOLDERS’ EQUITY (continued)
Except for the dividends declared mentioned above, the Company has not declared or paid dividends to its shareholders in the past, and may not choose to make additional distributions in the future. Any decision as to the payment of dividends will depend on the available earnings, the capital requirements of the Company, the Company’s general financial condition and other factors deemed pertinent by the board of directors.
Statutory reserve and restricted net assets
The Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China.
The
Company is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus
reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC
GAAP”). Appropriations to the statutory surplus reserve are required to be at least
Relevant
PRC laws and regulations restrict the Company’s PRC subsidiaries from transferring a portion of their net assets, equivalent to
their statutory reserves and their share capital, to the Company in the form of loans, advances or cash dividends. Only PRC entities’
accumulated profits may be distributed as dividends to the Company without the consent of a third party. As of March 31, 2022 and September
30, 2021, the restricted amounts as determined pursuant to PRC statutory laws totaled $
Cash transfer between the Company and its subsidiaries
For
the six months ended March 31, 2022, the Company received cash in the amount of $
NOTE 17 — COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. For the six months ended March 31, 2022 and 2021, the Company did not have any material legal claims or litigation that, individually or in aggregate, could have a material adverse impact on the Company’s consolidated financial position, results of operations and cash flows.
The
Company has an ongoing CIP project associated with the construction of a new manufacturing facility. As of March 31, 2022, future minimum
capital expenditures on the Company’s CIP project amounted to approximately $
F-28
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 — SEGMENT REPORTING
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, and is identified on the basis of the internal financial reports that are provided to, and regularly reviewed by, the Company’s chief operating decision maker in order to allocate resources and assess performance of the segment.
The
management of the Company concludes that it has only
The
Company’s products have similar economic characteristics with respect to raw materials, vendors, marketing and promotions, customers
and methods of distribution. The Company’s chief operating decision maker has been identified as the Chief Executive Officer, who
reviews consolidated results when making decisions about allocating resources and assessing performance of the Company, rather than by
product types or geographic area; hence the Company has only
Revenue by product source
| For the six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sales of TCMD products manufactured by the Company | $ | $ | ||||||
| Sales of third-party products | ||||||||
| Total revenue | $ | $ | ||||||
Revenue by product categories
The summary of our total revenues by product categories for the six months ended March 31, 2022 and 2021 was as follows:
| For the six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sales of TCMD products: | ||||||||
| Medicinal liquor products | $ | $ | ||||||
| Other chronic condition treatment products | ||||||||
| Cold and flu medicines | ||||||||
| Sub-total of TCMD products sales | ||||||||
| Sales of third-party products | ||||||||
| Biochemical drugs | ||||||||
| Traditional Chinese medicine pieces | ||||||||
| Medical instruments | ||||||||
| Dietary supplements | ||||||||
| Subtotal of third-party products sales | ||||||||
| Total revenue | $ | $ | ||||||
F-29
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — SUBSEQUENT EVENTS
On
June 15, 2022, the Company’s subsidiary, Jiangxi Universe, entered into a loan agreement with LRC Bank to borrow RMB
On
June 24, 2022, the Company’s subsidiary, Jiangxi Universe, signed a loan agreement with Bank of Communications to borrow RMB
The Company evaluated the subsequent event through the date of this report, and concluded that there are no material reportable subsequent events need to be disclosed.
NOTE 20 — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Pursuant
to the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, the condensed financial information of the parent company
shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end
of the most recently completed fiscal year. The Company performed a test on the restricted net assets of consolidated subsidiaries in
accordance with such requirement and concluded that it was applicable to the Company as the restricted net assets of the Company’s
subsidiaries exceeded
For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the Company’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party.
The condensed financial information of the parent company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the parent company used the equity method to account for investment in its subsidiaries. Such investment is presented on the condensed balance sheets as “Investment in subsidiaries” and the respective profit or loss as “Equity in earnings of subsidiaries” on the condensed statements of income.
The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the unaudited condensed consolidated financial statements of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S GAAP have been condensed or omitted.
As of March 31, 2022 and September 30, 2021, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except for those which have been separately disclosed in the unaudited condensed consolidated financial statements, if any.
F-30
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
PARENT COMPANY BALANCE SHEETS
| March 31, 2022 | September 30, 2021 | |||||||
| ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Short-term investments | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Investment in subsidiaries | $ | $ | ||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| LIABILITIES | $ | $ | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares, $ | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
F-31
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
PARENT COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| For the six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating costs and expenses: | ||||||||
| General and administrative expenses | $ | ( | ) | $ | ||||
| Other income (expenses): | ||||||||
| Income from short-term investments | ||||||||
| Other expenses | ( | ) | ( | ) | ||||
| Equity in earnings of subsidiaries | ||||||||
| Net income | ||||||||
| Foreign currency translation adjustments | ||||||||
| Comprehensive income attributable to the Company | $ | $ | ||||||
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
PARENT COMPANY STATEMENTS OF CASH FLOWS
| For the six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net cash flows from operating activities: | ||||||||
| Equity in earnings of subsidiary | ( | ) | ( | ) | ||||
| Short-term investment income | ( | ) | - | |||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net proceeds from issuance of ordinary shares in IPO | - | |||||||
| Cash lent to subsidiaries | - | ( | ) | |||||
| Cash repayment from subsidiaries | - | |||||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF CHANGES OF FOREIGN EXCHANGE RATES ON CASH | ( | ) | ( | ) | ||||
| CHANGES IN CASH | ( | ) | ||||||
| CASH, beginning of period | ||||||||
| CASH, end of period | $ | $ | ||||||
F-32
Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in the report on Form 6-K of which this document is a part. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in our annual report on Form 20-F for the fiscal year ended September 30, 2021, particularly under the caption “Item 3. Key Information—D. Risk Factors.”
Overview
Through our subsidiaries (the “PRC operating entities”) in the People’s Republic of China (“China” or the “PRC”), we are a pharmaceutical company specializing in the development, manufacturing, marketing and sale of traditional Chinese medicine derivatives (“TCMD”) products targeted to the elderly to address their physical conditions in the aging process and to promote their general well-being. We have registered and obtained approval for 26 varieties of TCMD products from the National Medical Products Administration (the “NMPA”), and we currently produce 13 varieties of TCMD products and sell them in 261 cities in 30 provinces in China as of the date of this filing. In addition, we also sell biomedical drugs, medical instruments, traditional Chinese medicine pieces (“TCMPs”) and dietary supplements manufactured by third-party pharmaceutical companies (collectively referred to as “third-party products”).
Our major customers are pharmaceutical companies, hospitals, clinics and drugstore chains, primarily located in Jiangxi Province, Jiangsu Province, Guangdong Province, Hubei Province, Fujian Province, Guangxi Province and Shandong Province, and 23 other provinces in China.
We have been profitable since 2015 and we believe we are well-positioned to benefit from the rapid growth of the TCMD market in China and to leverage the leading market position of our flagship products in order to further grow our business.
Recent Development
On December 1, 2021, the Company entered into definitive agreements (the “Agreements”) with Kitanihon Pharmaceutical Co., Ltd. (“Kitanihon”), a Japanese pharmaceutical company, pursuant to which (i) both parties will build a manufacturing facility in Ji’an, Jiangxi, China, for the manufacturing and research and development of traditional Chinese medicine derivatives products, with an aggregate area of over 430,000 square feet, and the Company will bear the costs associated with building the facility, and (ii) the Company will purchase 464 shares of Kitanihon for an aggregate of JPY176.32 million (approximately US$1.56 million). As the date of this report, the building of manufacturing facility has not started, and the Company has not acquired the 464 shares of Kitanihon.
In relation to the Agreements, Sununion Holding Group Limited (“Sununion”), the controlling shareholder of the Company wholly owned by Mr. Gang Lai, the chief executive officer and chairman of the board of directors of the Company, entered into an agreement with Mr. Gang Lai and Kitanihon on December 1, 2021, pursuant to which Kitanihon authorized the Company to use certain of its intangible assets, including technologies and certain intellectual properties, in exchange for which Mr. Gang Lai transferred 1,073,280 ordinary shares of Sununion owned by him and valued at US$2.5 million to Kitanihon.
COVID-19 Impact
Due to resurgence of COVID-19 pandemic in China in 2022 and related restrictive measures, including travel restrictions, the PRC operating entities have experienced delays in purchase of raw materials from suppliers and in delivering products to customers on a timely basis. The prices of the raw materials have also increased by about 5% as compared to the same period of last year. In addition, we granted some customers extended payment terms of 30 days to 120 days as a result of the COVID-19 pandemic. However, based on our present relationship with these customers and our evaluation of their financial conditions, we do not anticipate any material collectability problems. Currently, we do not expect the COVID-19 pandemic will have a materially adverse impact on the business operating of the PRC operating entities and our financial results. However, due to the high uncertainty of the evolving situation, we have limited visibility on how the COVID-19 affects the execution of customer contracts, the collection of customer payments, or disrupt our supply chain, and the continued uncertainties associated with COVID 19 may cause our revenue and cash flows to underperform in the next 12 months from the date our unaudited condensed consolidated financial statements are released. The extent of the future impact of the COVID-19 pandemic on our business and results of operations is still uncertain.
Key Financial Performance Indicators
In assessing our financial performance, we consider a variety of financial performance measures, including principal growth in net revenue and gross profit, our ability to control costs and operating expenses to improve our operating efficiency and net income. Our review of these indicators facilitates timely evaluation of the performance of our business and effective communication of results and key decisions, allowing our business to respond promptly to competitive market conditions and different demands and preferences from our customers. The key measures that we use to evaluate the performance of our business are set forth below.
Net Revenue
Our revenue is reported net of all value added taxes (“VAT”). Our products are sold with no right of return and we do not provide other credits or sales incentive to customers. Our revenue is driven by changes in the number of customers, sales volume, selling price, and mix of products sold.
| For the Six Months Ended March 31, | Variance | |||||||||||
| 2022 | 2021 | % | ||||||||||
| Revenue from sales of self-manufactured TCMD products | 63.4 | % | 54.8 | % | 15.3 | % | ||||||
| Revenue from sales of third-party products | 36.6 | % | 45.2 | % | (19.4 | )% | ||||||
| Total revenue | 100.0 | % | 100.0 | % | ||||||||
| Number of customers | 1,205 | 1,092 | 10.3 | % | ||||||||
| Sales volume by unit- TCMD products | 6,966,256 | 9,140,000 | (23.8 | )% | ||||||||
| Sales volume by unit- third party products | 4,763,265 | 5,043,984 | (5.6 | )% | ||||||||
| Total sales volume | 11,729,521 | 14,183,984 | (17.3 | )% | ||||||||
| Average selling price per unit- TCMD products | $ | 2.20 | $ | 1.46 | 50.7 | % | ||||||
| Average selling price per unit- Third-party products | $ | 1.86 | $ | 2.18 | (14.7 | )% | ||||||
2
Revenues from sales of TCMD products manufactured by us accounted for 63.4% and 54.8% of our total revenues for the six months ended March 31, 2022 and 2021, respectively. The 13 TCMD products manufactured by us fall into two categories: (i) treatment and relief for common chronic health conditions in the elderly designed to achieve physical wellness and longevity (“Chronic Condition Treatments”) and (ii) cold and flu medications. Our Chronic Condition Treatments primarily include Guben Yanling Pill, Shenrong Weisheng Pill, Quanlu Pill, Yangxue Danggui Syrup, Wuzi Yanzong Oral Liquid, Fengtong Medicinal Liquor, Shenrong Medicinal Liquor, Qishe Medicinal Liquor, Fengshitong Medicinal Liquor, and Shiquan Dabu Medicinal Liquor, and our cold and flu medications primarily include Paracetamol Granule for Children, Isatis Root Granule and Qiangli Pipa Syrup.
Sales volume of our TCMD products decreased by 2,173,744 units, or 23.8%, from 9,140,000 units sold in six months ended March 31, 2021 to 6,966,256 units sold in six months ended March 31, 2022. The decrease in our sales volume was due to our inability to timely fulfill the orders of our customer in February and March 2022 due to the resurgence of COVID-19 cases in China, and accordingly our sales volume was negatively impacted in the six months ended March 31, 2022, which was lower than that of the six months ended March 31, 2021. As affected by the inflation and increased costs of raw materials, we adjusted our selling price of TCMD products accordingly. The average selling price of our TCMD products increased by 50.7%, from $1.46 per unit in the six months ended March 31, 2021 to $2.20 per unit in the six months ended March 31, 2022. On the other hand, the exchange rate between Renminbi, or RMB, and U.S. dollars, or US$, was US$1.00 to RMB6.5541 in the six months ended March 31, 2021 as compared to US$1.00 to RMB6.3717 in the six months ended March 31, 2022. The appreciation of RMB against US$ had a 2.9% positive impact on our reported total revenues. These combined factors led to a 15.3% increase in our revenue from sales of our TCMD products from six months ended March 31, 2021 to six months ended March 31, 2022.
In order to diversify our product offerings and product mix, in addition to selling our self-manufactured TCMD products, we also sell products manufactured by third-party pharmaceutical companies, including (i) biomedical drugs, such as liquid glucose, prednisolone, and citicoline, (ii) medical instruments, such as drug-eluting stents, surgical tubes and syringes, (iii) TCMPs, such as red sage tables, Longdan Xiegan pills, and Chinese skullcap capsules, and (iv) dietary supplements, such as vitamins, probiotic powder, and calcium tablets.
Revenues from sales of third-party products accounted for 36.6% and 45.2% of our total revenues for the six months ended March 31, 2022 and 2021, respectively. Sales volume of third-party products decreased by 280,719 units or 5.6%, from 5,043,984 units sold in the six months ended March 31, 2021 to 4,763,265 units sold in the six months ended March 31, 2022, while the average selling price of third-party products decreased by 14.7% from $2.18 per unit in the six months ended March 31, 2021 to $1.86 per unit in the six months ended March 31, 2022 as affected by changes in product mix based on customer orders. On the other hand, the exchange rate between RMB and US$ was US$1.00 to RMB6.5541 in the six months ended March 31, 2021 as compared to US$1.00 to RMB6.3717 in the six months ended March 31, 2022. The appreciation of RMB against US$ had a 2.9% positive impact on our reported total revenues. These factors led to a 19.4% decrease in our revenue from sales of our third-party products from the six months ended March 31, 2021 to the six months ended March 31, 2022. For future third-party product sales, our strategy is to select and distribute certain high-quality products with higher margin. We do not expect that the sales of third party products will outpace the sales of our own TCMD products going forward.
Gross Profit
Gross profit is equal to net revenue minus cost of goods sold. Cost of goods sold primarily includes inventory costs (raw materials, labor, packaging cost, depreciation and amortization, third-party products purchase price, freight costs and overhead). Cost of goods sold generally changes as our production costs change, as these are affected by factors including the market price of raw materials, labor productivity, or the purchase price of third-party products, and as the customer and product mix changes. Our cost of revenues accounted for 43.2% and 50.7% of our total revenue for the six months ended March 31, 2022 and 2021, respectively. We expect our cost of revenues to increase as we further expand our operations in the foreseeable future.
3
Our gross margin was 56.8% for the six months ended March 31, 2022, an increase by 7.5% from the gross margin of 49.3% in the six months ended March 31, 2021. Our gross profit and gross margin is affected by sales of different product mix during each reporting period. Our gross margin increases when more products with lower costs and higher margin are sold, while our gross margin decreases when more products with higher costs and lower margin are sold. The sales of product mix changed during six months ended March 31, 2022 as compared to six months ended March 31, 2021 because more products with higher costs and lower margin had been sold to our customers, thereby increasing our gross margin.
Operating Expenses
Our operating expenses consist of selling expenses, general and administrative expenses and research and development expenses.
Our selling expenses primarily include salary and welfare benefit expenses paid to our sales personnel, advertising expenses to increase the awareness of our brand, shipping and delivery expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses. Our selling expenses accounted for 37.5% and 4.6% of our total revenue for the six months ended March 31, 2022 and 2021, respectively. We expect our overall selling expenses, including but not limited to, advertising expenses and brand promotion expenses and salaries, to increase in the foreseeable future and facilitate the growth of our business, especially when we continue to expand our business and promote our products to customers located at extended geographic areas.
Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation, bad debt reserve expenses, inspection and maintenance expenses, office supply and utility expenses, business travel and meals expenses, land and property taxes and professional service expenses. General and administrative expenses were 7.6% and 4.1% of our revenue for the six months ended March 31, 2022 and 2021, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, to continue to increase in the foreseeable future, as we plan to hire additional personnel and incur additional expenses in connection with the expansion of our business operations.
The Chinese patent medicine industry is characterized by rapid and frequent changes in customer demand and launches of new products. If we do not launch new products or improve our existing products to meet the changing demands of our customers in a timely manner, some of our products could become uncompetitive in the market, thereby adversely affecting on our revenues and operating results. Our research and development expenses primarily consist of salaries, welfare and insurance expenses paid to our employees involved in the research and development activities, materials and supplies used in the development and testing of new TCMD products, depreciation, and other miscellaneous expenses. Research and development expenses were 0.6% and 1.3% of our revenue for the six months ended March 31, 2022 and 2021 respectively. As we continue to develop new products and diversify our product offerings to satisfy customer demand, we expect our research and development expenses to continue to increase in the foreseeable future.
4
Financial Results for the Six Months Ended March 31, 2022 Compared to the Six Months Ended March 31, 2021
The following table summarizes the results of our operations during the six months ended March 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
| For the Six Months Ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| Amount | % of revenue | Amount | % of revenue | Amount | % | |||||||||||||||||||
| REVENUE | $ | 24,202,340 | 100.0 | % | $ | 24,292,948 | 100.0 | % | $ | (90,608 | ) | (0.4 | )% | |||||||||||
| COST OF REVENUE | 10,445,906 | 43.2 | % | 12,304,678 | 50.7 | % | (1,858,772 | ) | (15.1 | )% | ||||||||||||||
| GROSS PROFIT | 13,756,434 | 56.8 | % | 11,988,270 | 49.3 | % | 1,768,164 | 14.7 | % | |||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||
| Selling expenses | 9,079,771 | 37.5 | % | 1,109,287 | 4.6 | % | 7,970,484 | 718.5 | % | |||||||||||||||
| General and administrative expenses | 1,830,923 | 7.6 | % | 985,498 | 4.1 | % | 845,425 | 85.8 | % | |||||||||||||||
| Research and development expenses | 144,461 | 0.6 | % | 310,668 | 1.3 | % | (166,207 | ) | (53.5 | )% | ||||||||||||||
| Total operating expenses | 11,055,155 | 45.7 | % | 2,405,453 | 10.0 | % | 8,649,702 | 359.6 | % | |||||||||||||||
| INCOME FROM OPERATIONS | 2,701,279 | 11.2 | % | 9,582,817 | 39.4 | % | (6,881,538 | ) | (71.8 | )% | ||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||
| Interest expense, net | (88,389 | ) | (0.4 | )% | (46,671 | ) | (0.2 | )% | (41,718 | ) | 89.4 | % | ||||||||||||
| Other income (expense), net | 634 | 0.0 | % | (8,227 | ) | 0.1 | % | 8,861 | (107.7 | )% | ||||||||||||||
| Equity investment income | 696,430 | 2.9 | % | 30,626 | 0.1 | % | 665,804 | 2174.0 | % | |||||||||||||||
| Total other income (expense), net | 608,675 | 2.5 | % | (24,272 | ) | (0.1 | )% | 632,947 | (2607.7 | )% | ||||||||||||||
| INCOME BEFORE INCOME TAX PROVISION | 3,309,954 | 13.7 | % | 9,558,545 | 39.3 | % | (6,248,591 | ) | (65.4 | )% | ||||||||||||||
| PROVISION FOR INCOME TAXES | 1,578,219 | 6.5 | % | 2,410,747 | 9.9 | % | (832,528 | ) | (34.5 | )% | ||||||||||||||
| NET INCOME | $ | 1,731,735 | 7.2 | % | $ | 7,147,798 | 29.4 | % | $ | (5,416,063 | ) | (75.8 | )% | |||||||||||
Revenues. We currently produce and sell 13 varieties of TCMD products and also sell products manufactured by third-party pharmaceutical companies, to our customers.
| For the six months ended March 31, | ||||||||||||||||
| 2022 | 2021 | Change | ||||||||||||||
| Amount | Amount | Amount | % | |||||||||||||
| Revenue - TCMD products sales | $ | 15,354,635 | $ | 13,318,921 | $ | 2,035,714 | 15.3 | % | ||||||||
| Revenue – third-party products sales | 8,847,705 | 10,974,027 | (2,126,322 | ) | (19.4 | )% | ||||||||||
| Total revenue | $ | 24,202,340 | $ | 24,292,948 | $ | (90,608 | ) | (0.4 | )% | |||||||
5
| For the six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sales of TCMD products: | ||||||||
| Medicinal liquor products | $ | 765,793 | $ | 1,133,879 | ||||
| Other chronic condition treatment products | 12,077,570 | 9,700,934 | ||||||
| Cold and flu medicines | 2,511,272 | 2,484,108 | ||||||
| Sub-total of TCMD products sales | 15,354,635 | 13,318,921 | ||||||
| Sales of third-party products: | ||||||||
| Biochemical drugs | 1,366,017 | 9,434,645 | ||||||
| Traditional Chinese medicine pieces | 7,431,251 | 20,570 | ||||||
| Medical instruments | 50,437 | 1,517,860 | ||||||
| Dietary supplements | - | 952 | ||||||
| Subtotal of third-party products sales | 8,847,705 | 10,974,027 | ||||||
| Total revenue | $ | 24,202,340 | $ | 24,292,948 | ||||
Our total revenues decreased by $90,608, or 0.4%, to $24,202,340 for the six months ended March 31, 2022 from $24,292,948 for the six months ended March 31, 2021.
Revenue from sales of our TCMD products
Sales of our TCMD products increased by $2,035,714, or 15.3%, from $13,318,921 in the six months ended March 31, 2021 to $15,354,635 in the six months ended March 31, 2022. The increase in the sales of our TCMD product was due to the following specific reasons:
| a) | The COVID-19 pandemic led to disruptions of supply chain and transportation and an overall increase in the market price of the raw materials used in manufacturing of our TCMD products. Accordingly, we adjusted the selling prices of our TCMD products in response to the increase in raw material purchase costs and general inflation. Our weighted average unit selling price of TCMD products increased by $0.74 per unit, or 50.7%, from $1.46 per unit in the six months ended March 31, 2021 to $2.20 per unit in the six months ended March 31, 2022. The higher selling price contributed to the increase in sales revenue of our TCMD products in the six months ended March 31, 2022. |
| b) | Due to recent COVID-19 resurgence in China, which caused transportation and travel restrictions, we experienced difficulties shipping and delivering our products to customers located in certain remote geographic areas. This led to lower sales volume of our TCMD products by 23.8% in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021. Our sales volume of TCMD products decreased by 2,173,744 units from 9,140,000 units in the six months ended March 31, 2021 to 6,966,256 units in the six months ended March 31, 2022. |
| c) | The exchange rate between RMB and US$ was US$1.00 to RMB6.5541 in the six months ended March 31, 2021 as compared to US$1.00 to RMB6.3717 in the six months ended March 31, 2022. The appreciation of RMB against US$ had a 2.9% positive impact on our reported revenues. |
6
Revenue from sales of third-party products
Sales of third-party products decreased by $2,126,322, or 19.4%, from $10,974,027 in the six months ended March 31, 2021 to $8,847,705 in the six months ended March 31, 2022. Sales volume of third-party products slightly decreased by 5.6%, from 5,043,984 units sold in the six months ended March 31, 2021 to 4,763,265 units sold in the six months ended March 31, 2022. In addition, due to change in product mix, our weighted average selling price of third-party products decreased by $0.32 per unit, or 14.7%, from $2.18 per unit in the six months ended March 31, 2021 to $1.86 per unit in the six months ended March 31, 2022. The exchange rate between RMB and US$ was US$1.00 to RMB6.5541 in the six months ended March 31,2021 as compared to US$1.00 to RMB6.3717 in the six months ended March 31, 2022. The appreciation of RMB against US$ had a 2.9% positive impact on our reported revenues from sales of third-party products.
Cost of Revenues. Our cost of revenues primarily consists of inventory costs (raw materials, labor, packaging cost, depreciation and amortization, third-party products purchase price, freight costs and overhead) and business tax. Cost of revenues generally changes as our production costs change, which are affected by factors including the market price of raw materials, labor productivity, or the purchase price of third-party products, and as the customer and product mix changes.
| For the six months ended March 31, | ||||||||||||||||
| 2022 | 2021 | Change | ||||||||||||||
| Amount | Amount | Amount | % | |||||||||||||
| Cost of revenue- TCMD products | $ | 4,953,950 | $ | 5,417,129 | $ | (463,179 | ) | (8.6 | )% | |||||||
| Cost of revenue- third-party products | 5,491,956 | 6,887,549 | (1,395,593 | ) | (20.3 | )% | ||||||||||
| Total cost of revenue | $ | 10,445,906 | $ | 12,304,678 | $ | (1,858,772 | ) | (15.1 | )% | |||||||
Our cost of revenues decreased by $1,858,772, or 15.1%, from $12,304,678 in the six months ended March 31, 2021 to $10,445,906 in the six months ended March 31, 2022. The decrease in our cost of revenues was primarily due to decreased sales volume, increased raw material and third-party product purchase costs, and a 2.9% exchange rate impact as discussed in more details below.
Cost of revenues of TCMD products
Cost of revenues of TCMD products accounted for 47.4% and 44.0% of our total costs of revenues for the six months ended March 31, 2022 and 2021, respectively. Cost of revenues of TCMD products decreased by $463,179, or 8.6%, from $5,417,129 in the six months ended March 31, 2021 to $4,953,950 in the six months ended March 31, 2022. The decrease in cost of revenues of our TCMD products was due to the following reasons:
| (1) | Sales volume of TCMD products decreased by 23.8%, from 9,140,000 units sold in the six months ended March 31, 2021 to 6,966,256 units sold in the six months ended March 31, 2022. Due to recent resurgence of the COVID-19 pandemic and related transportation and travel restrictions, we experienced difficulties shipping and delivering our products to customers located in certain remote geographic areas. These factors led to lower sales volume of our TCMD products in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021. As sales volume decreased in the six months ended March 31, 2022, raw materials, labor, packaging, freight and overhead costs associated with our TCMD product sales also decreased. |
| (2) | As a result of inflation and increased market price of raw materials, the average per unit cost of our TCMD products increased by $0.12, or 20.3%, from $0.59 per unit in the six months ended March 31, 2021 to $0.71 per unit in the six months ended March 31, 2022. Among the 13 varieties of TCMD products, cost of revenues of Guben Yanling Pill, one of our key products, accounted for 20.5% and 20.0% of our total cost of revenues in the six months ended March 31, 2022 and 2021, respectively. Unit production costs of Guben Yanling Pill increased by $0.33 per unit or 34.0% from $0.98 per unit in the six months ended March 31, 2021 to $1.32 per unit in the six months ended March 31, 2022. In addition, unit production cost of Shiquan Dabu Medicinal Liquor, Shenrong Medicinal Liquor, Fengshitong Medicinal Liquor, Qishe Medicinal Liquor, Wuzi Yanzong Oral Liquid and Qiangli Pipa Syrup increased by 46.9%, 38.3%, 54.5%, 30.5%, 22.6% and 37.2%, respectively. |
7
| (3) |
The exchange rate between RMB and US$ was US$1.00 to RMB6.5541 in the six months ended March 31, 2021 as compared to US$1.00 to RMB6.3717 in the six months ended March 31, 2022. The appreciation of RMB against US$ had a 2.9% positive impact on our cost of revenues from sales of TCMD products.
The decrease in our cost of revenues of our TCMD products in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021 reflected the above-mentioned factors combined. |
Cost of revenues of third-party products
Cost of revenues of third-party products accounted for 52.6% and 56.0% of our total costs of revenues for the six months ended March 31, 2022 and 2021, respectively. Cost of revenues of third-party products decreased by $1,395,593, or 20.3%, from $6,887,549 in the six months ended March 31, 2021 to $5,491,956 in the six months ended March 31, 2022, because of a decrease in the average unit cost of third-party products by $0.22 per unit, or 16.1%, from $1.37 per unit in the six months ended March 31, 2021 to $1.15 per unit in the six months ended March 31, 2022, and also affected by a decrease in sales volume of third-party products by 5.6%. In addition, the exchange rate between RMB and US$ was US$1.00 to RMB6.5541 in the six months ended March 31, 2021 as compared to US$1.00 to RMB6.3717 in the six months ended March 31, 2022. The appreciation of RMB against US$ had a 2.9% positive impact on our cost of revenues from sales of third-party products.
These factors led to the decrease in cost of revenues associated with third-party product sales in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021.
Gross profit
Our gross profit increased by $1,768,164, from $11,988,270 in the six months ended March 31, 2021 to $13,756,434 in the six months ended March 31, 2022. Our gross margin increased by 7.5% from 49.3% in the six months ended March 31, 2021 to 56.8% in the six months ended March 31, 2022.
| For the six months ended March 31, | ||||||||||||||||
| 2022 | 2021 | Change | ||||||||||||||
| Amount | Amount | Amount | % | |||||||||||||
| Gross profit- TCMD products | $ | 10,440,685 | $ | 7,901,792 | $ | 2,498,893 | 31.6 | % | ||||||||
| Gross profit- third-party products | 3,355,749 | 4,086,478 | (730,729 | ) | (17.9 | )% | ||||||||||
| Total gross profit | $ | 13,756,434 | $ | 11,988,270 | $ | 1,768,164 | 14.7 | % | ||||||||
| Gross margin- TCMD products | 67.7 | % | 59.3 | % | 8.4 | % | ||||||||||
| Gross margin- third party products | 37.9 | % | 37.2 | % | 0.7 | % | ||||||||||
| Total gross margin | 56.8 | % | 49.3 | % | 7.5 | % | ||||||||||
| Average selling price per unit- TCMD products | $ | 2.20 | $ | 1.46 | $ | 0.74 | 50.7 | % | ||||||||
| Average cost per unit- TCMD products | $ | 0.71 | $ | 0.59 | $ | 0.12 | 20.3 | % | ||||||||
| Average selling price per unit- third party products | $ | 1.86 | $ | 2.18 | $ | (0.32 | ) | (14.7 | )% | |||||||
| Average cost per unit - third party products | $ | 1.15 | $ | 1.37 | $ | (0.22 | ) | (16.1 | )% | |||||||
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Gross profit from the sales of our TCMD products increased by $2,498,893, or 31.6%, from $7,901,792 in the six months ended March 31, 2021 to $10,400,685 in the six months ended March 31, 2022, and the gross margin of our TCMD products increased by 8.4%, from 59.3% in the six months ended March 31, 2021 to 67.7% in the six months ended March 31, 2022. The increase in our gross profit from the sales of TCMD products was due to the following reasons: (i) as discussed above, we adjusted the selling prices of our TCMD products in response to the increase in raw material purchase costs and general inflation. Our weighted average unit selling price of TCMD products increased by $0.74 per unit, or 50.7%, from $1.46 per unit in the six months ended March 31, 2021 to $2.20 per unit in the six months ended March 31, 2022. The higher selling prices of our TCMD products increased the profitability from our sales of TCMD products; (ii) our gross profit and gross margin were affected by the sales of different product mix during each reporting period. During the six months ended March 31, 2022, as a result of the changes in the average selling price and changes in sales mix as determined by customer orders, our gross profit associated with the sales of Guben Yanling Pill, Quanlu Pill and Shengrong Weisheng Pill increased by $2,412,796, $262,375 and $89,334 respectively, as compared to the six months ended March 31, 2021; and (iii) the appreciation of RMB against US$ had a 2.9% positive impact on our gross profit from sales of TCMD products.
Gross profit from third-party product sales decreased by $730,729, or 17.9%, from $4,086,478 in the six months ended March 31, 2021 to $3,355,749 in the six months ended March 31, 2022, while the gross margin of third-party product sales slightly increased by 0.7%, from 37.2% in the six months ended March 31, 2021 to 37.9% in the six months ended March 31, 2022. The average unit selling price of third-party products decreased by 14.7%, or $0.32 per unit, while the average unit cost of third-party products also decreased by 16.1%, or $0.22 per unit. The decrease in the average selling price outpaced the decrease in average unit cost of third-party products by $0.10 per unit. The decrease in our gross profit from third-party products was affected by changes in sales of different product mix in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021. For example, the largest portion of decrease in gross profit of third-party products was associated with sales of biochemical drugs products, which decreased by $2,818,098 when sales volume decreased by 93.2% while the average unit purchase cost increased by 85.9% or $1.07 per unit when comparing the six months ended March 31, 2022 to the six months ended March 31, 2021. Higher purchase price on biochemical drug products lowered down our gross profit in the six months ended March 31, 2022. On the other hand, gross profit associated with sales of TCMPs increased by $2,732,948 as a result of increased sales volume by 4,398,513 units, and decreased average unit purchase cost by 53.0%. These combined factors led to the decrease in our gross profit from sales of third-party products for the six months ended March 31, 2022. For future third-party product sales, our strategy is to select and distribute certain high-quality products with higher margin. We do not expect that the sales of third party products will outpace the sales of our own TCMD products going forward.
Operating expenses
The following table sets forth the breakdown of our operating expenses for the six months ended March 31, 2022 and 2021:
| For the six months ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| Amount | % of revenue | Amount | % of revenue | Amount | % | |||||||||||||||||||
| Total revenue | $ | 24,202,340 | 100.0 | % | $ | 24,292,948 | 100.0 | % | $ | (90,608 | ) | (0.4 | )% | |||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | 9,079,771 | 37.5 | % | 1,109,287 | 4.6 | % | 7,970,484 | 718.5 | % | |||||||||||||||
| General and administrative expenses | 1,830,923 | 7.6 | % | 985,498 | 4.1 | % | 845,425 | 85.8 | % | |||||||||||||||
| Research and development expenses | 144,461 | 0.6 | % | 310,668 | 1.3 | % | (166,207 | ) | (53.5 | )% | ||||||||||||||
| Total operating expenses | $ | 11,055,155 | 45.7 | % | $ | 2,405,453 | 10.0 | % | $ | 8,649,702 | 359.6 | % | ||||||||||||
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Selling expenses
Our selling expenses primarily include salaries and welfare benefit expenses paid to our sales personnel, advertising expenses to increase our brand awareness, shipping and delivery expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses.
| For the six months ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Salary and employee benefit expenses | $ | 447,162 | 5.0 | % | $ | 411,310 | 37.1 | % | $ | 35,852 | 8.7 | % | ||||||||||||
| Advertising expenses | 8,219,488 | 90.5 | % | 266,884 | 24.1 | % | 7,952,604 | 2979.8 | % | |||||||||||||||
| Shipping and delivery expenses | 347,908 | 3.8 | % | 393,446 | 35.5 | % | (45,538 | ) | (11.6 | )% | ||||||||||||||
| Business travel and meals expenses | 57,488 | 0.6 | % | 27,145 | 2.4 | % | 30,343 | 111.8 | % | |||||||||||||||
| Other sales promotion related expenses | 7,725 | 0.1 | % | 10,502 | 0.9 | % | (2,777 | ) | (26.4 | )% | ||||||||||||||
| Total selling expenses | $ | 9,079,771 | 100.0 | % | $ | 1,109,287 | 100.0 | % | $ | 7,970,484 | 718.5 | % | ||||||||||||
Our selling expenses increased by $7,970,484, or 718.5%, from $1,109,287 in the six months ended March 31, 2021 to $9,079,771 in the six months ended March 31, 2022, primarily attributable to (i) an increase in advertising expenses by $7,952,604, or 2979.8%, from $266,884 in the six months ended March 31, 2021 to $ 8,219,488 in the six months ended March 31, 2022. In September 2021, we entered into an advertising service agreement with a third party, Guangdong Fengyang Legend Consulting Co., Ltd. (“Fengyang Legend”), pursuant to which, Fengyang Legend agreed to assist us in developing and producing a TV advertisement for promoting the sales of our major TCMD products, Bai Nian Dan and Guben Yanling Pill, and coordinating with a TV channel to broadcast the advertisement to targeted geographic market areas. Pursuant to the terms under this agreement, we made an advance payment in the amount of 30% of the total advertising service fee to Fengyang Legend, and we paid Fengyang Legend another 58% of the total advertising service fee when the TV channel on which the advertisement is broadcasted was determined. Since our TV advertisement was first broadcasted in October 2021, our prepayment to Fengyang Legend has been charged to advertising expenses during the six months ended March 31, 2022, which led to higher advertising expenses in the six months ended March 31, 2022; (ii) an increase in our salary and benefit expenses paid to our sales employees by $35,852, or 8.7%, from $411,310 in the six months ended March 31, 2021 to $447,162 in the six months ended March 31, 2022, and an increase in business travel and meals expense by $30,343 or 111.8%, from $27,145 in the six months ended March 31, 2021 to $57,488 in the six months ended March 31, 2022, primarily due to our increased sales activities during the six months ended March 31, 2022; and (iii) a decrease in shipping and delivery expenses by $45,538, or 11.6%, from $393,446 in the six months ended March 31, 2021 to $347,908 in the six months ended March 31, 2022, due to our decreased sales volume during the six months ended March 31, 2022. These above-mentioned factors combined led to the increase in our selling expenses in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021. As a percentage of revenues, our selling expenses accounted for 37.5% and 4.6% of our total revenue for the six months ended March 31, 2022 and 2021, respectively.
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General and Administrative Expenses
Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation, bad debt reserve expenses, inspection and maintenance expenses, office supply and utility expenses, business travel and meals expenses, land and property taxes and professional service expenses.
| For the six months ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Salary and employee benefit expense | $ | 345,344 | 18.9 | % | $ | 307,433 | 31.2 | % | $ | 37,911 | 12.3 | % | ||||||||||||
| Depreciation and amortization | 113,962 | 6.2 | % | 109,103 | 11.1 | % | 4,859 | 4.5 | % | |||||||||||||||
| Bad debt reserve expenses (recovery) | 484,811 | 26.5 | % | (203,253 | ) | (20.6 | )% | 688,064 | (338.5 | )% | ||||||||||||||
| Land and property tax | 53,348 | 2.9 | % | 51,886 | 5.3 | % | 1,462 | 2.8 | % | |||||||||||||||
| Office supply and utility expense | 255,627 | 14.0 | % | 150,857 | 15.3 | % | 104,770 | 69.4 | % | |||||||||||||||
| Transportation, business travel and meals expense | 50,217 | 2.7 | % | 14,196 | 1.4 | % | 36,021 | 253.7 | % | |||||||||||||||
| Consulting fee | 474,026 | 25.9 | % | 520,726 | 52.8 | % | (46,700 | ) | (9.0 | )% | ||||||||||||||
| Inspection and maintenance fee | 29,695 | 1.6 | % | 9,841 | 1.0 | % | 19,854 | 201.7 | % | |||||||||||||||
| Stamp tax and other expenses | 23,893 | 1.3 | % | 24,709 | 2.5 | % | (816 | ) | (3.3 | )% | ||||||||||||||
| Total general and administrative expenses | $ | 1,830,923 | 100.0 | % | $ | 985,498 | 100.0 | % | $ | 845,425 | 85.8 | % | ||||||||||||
Our general and administrative expenses increased by $845,425 or 85.8% from $985,498 in the six months ended March 31, 2021 to $1,830,923 in the six months ended March 31, 2022, primarily attributable to (i) an increase in our office supply and utility expenses by $104,770, or 69.4%, to support our administration activities; (ii) an increase in our salaries, welfare expenses and insurance expenses paid to administration employees by $37,911, or 12.3%, because of a higher amount of annual bonus distributed to administrative staffs in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021, and (iii) an increase in bad debt expense by $688,064 or 338.5% because we accrued more bad debt expenses based on our assessment of the collectability of the accounts receivable and advance to suppliers, offset by a decrease in consulting fees by $46,700 because we incurred higher amount of consulting services fees in the six months ended March 31, 2021 before we completed our initial public offering (the “IPO”). The overall increase in our general and administrative expenses in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 7.6% and 4.1% of our revenue for the six months ended March 31, 2022 and 2021, respectively.
Research and development expenses
Our research and development expenses primarily consist of salaries, welfare and insurance expenses paid to our employees involved in the research and development activities, materials and supplies used in the development and testing new TCMD products, depreciation and other miscellaneous expenses.
| For the six months ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Salary and employee benefit expenses to research and development staff | $ | 82,198 | 56.9 | % | $ | 75,133 | 24.2 | % | $ | 7,065 | 9.4 | % | ||||||||||||
| Materials used in research and development activities | 52,262 | 36.2 | % | 226,800 | 73.0 | % | (174,538 | ) | (77.0 | )% | ||||||||||||||
| Depreciation and others | 10,001 | 6.9 | % | 8,735 | 2.8 | % | 1,266 | 14.5 | % | |||||||||||||||
| Total research and development expenses | $ | 144,461 | 100.0 | % | $ | 310,668 | 100.0 | % | $ | (166,207 | ) | (53.5 | )% | |||||||||||
11
Research and development expenses decreased by $166,207, or 53.5%, from $310,668 for the six months ended March 31, 2021 to $144,461 for the six months ended March 31, 2022, primarily attributable to a decrease in the materials used in the research and development activities. As a percentage of revenues, research and development expenses were 0.6% and 1.3% of our revenue for the six months ended March 31, 2022 and 2021, respectively.
Other income (expenses), net
Total other income, net, increased by $632,947 or 2,607.7%, from a net other expenses of $24,272 in the six months ended March 31, 2021 to a net other income $608,675 in the six months ended March 31, 2022, due to the following reasons:
| (i) | interest expenses increased by $41,718, or 89.4%, from $46,671 in the six months ended March 31, 2021 to $88,389 in the six months ended March 31, 2022. The increase in our interest expenses was due to higher amount of outstanding loans we carried during the six months ended March 31, 2022 as compared to the six months ended March 31, 2021; and |
| (ii) | our short-term investment income increased by $696,430 in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021. We had short-term investments of $14.3 million in wealth management financial products from financial institutions to generate investment income, which we purchased with our IPO proceeds. Such short-term investment can be redeemed anytime at our discretion and is highly liquid. |
Provision for Income Taxes
Our provision for income taxes was $1,578,219 in the six months ended March 31, 2022, a decrease of $832,528, or 34.5% from $2,410,747 in the six months ended March 31, 2021 due to our decreased taxable income. Under the Enterprise Income Tax Law, or the EIT Law, domestic enterprises and foreign investment enterprises are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on a case-by-case basis. The EIT Law grants preferential tax treatment to High and New Technology Enterprises (“HNTEs”, individually an “HNTE”). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for their HNTE status every three years. Jiangxi Universe Pharmaceuticals Co., Ltd., a limited liability company organized under the laws of the PRC, or Jiangxi Universe, one of our main operating subsidiaries in the PRC, was approved as an HNTE and was entitled to a reduced income tax rate of 15% beginning November 2016 with a term of three years. Jiangxi Universe’s HNTE status was successfully renewed in December 2019 for a term of three additional years. The EIT Law is typically enforced by the local tax authorities in the PRC. Each local tax authority has the discretion to grant tax holidays to local enterprises as a way to encourage entrepreneurship and stimulate local economy. The corporate income taxes for the six months ended March 31, 2022 and 2021 were reported at a blended reduced rate since Jiangxi Universe enjoys a 15% reduced income tax rate due to its HNTE status, and Jiangxi Universe Pharmaceuticals Trade Co., Ltd. (“Universe Trade”) and Guangzhou Universe Hanhe Medical Research Co., Ltd. (“Universe Hanhe”), the wholly owned subsidiaries of Jiangxi Universe, are subject to a standard 25% income tax rate. Our effective tax rate was 47.7% and 25.2% for the six months ended March 31, 2022 and 2021, respectively. The increase in effective tax rate of approximately 22.5% was primarily due to more taxable income was generated from Universe Trade with 25% income tax rate during the six months ended March 31, 2022. For the same period of 2021, more taxable income was generated from Jiangxi Universe with 15% income tax rate.
Net Income
As a result of the foregoing, we reported a net income of $1,731,735 for the six months ended March 31, 2022, representing a $5,416,063 decrease from a net income of $7,147,798 for the six months ended March 31, 2021.
12
Liquidity and Capital Resources
As of March 31, 2022, we had $14,236,300 in cash on hand. We also had short-term investments of $14.3 million in wealth management financial products from financial institutions to generate investment income, which we purchased with our IPO proceeds. Such short-term investment can be redeemed anytime at our discretion and is highly liquid. As of March 31, 2022, we also had $18.8 million in accounts receivable. Our accounts receivable primarily include balance due from customers for our pharmaceutical products sold and delivered to customers. No single customer accounts for more than 10% of our total accounts receivable balance as of March 31, 2022. Approximately 64.9%, or $12.2 million, of our net accounts receivable balance as of March 31, 2022 had been subsequently collected. Collected accounts receivable will be used as working capital in our operations, if necessary.
As of March 31, 2022, our inventory balance amounted to $3,385,872, primarily consisting of raw materials and work-in-progress and finished TCMD products, which we believe are able to be sold quickly based on the analysis of the current trends in demand for our products.
During the fiscal year 2021, we also started to construct new manufacturing facilities in order to expand our future production capacity, and we had made a prepayment of approximately RMB69.2 million (approximately $10.9 million) to Jiangxi Chenyuan Construction Project Co., Ltd. (“Chenyuan”), a sub-contractor, to start the construction-in-progress project, or CIP project, including land improvement, building foundation and the construction of the manufacturing plants. As of March 31, 2022, $450,056 (approximately RMB2.9 million) of prepayment for the CIP project had been used for construction work, and the amount was recorded as construction in progress which was included in property, plant and equipment in the consolidated balance sheets. As of March 31, 2022, the $10.4 million prepayment to Chenyuan was recorded as prepayment for the CIP project on the balance sheets. There was no additional significant prepayment to the sub-contractor during the six months ended March 31, 2022. As of March 31, 2022, future additional capital expenditure on this CIP project was estimated to be approximately RMB95.8 million (equivalent to $15.1 million), among which approximately $3.9 million is required for the fiscal year ending September 30, 2023. We currently plan to support our ongoing CIP project through cash flows from operations, proceeds received from the IPO, and borrowings from banks, if necessary.
In fiscal year 2021, we made a prepayment of approximately $2.5 million to a related party in order to purchase certain residential and commercial property. On May 6, 2021, we entered into a real estate property purchase agreement with a related party, Jiangxi Yueshang Investment Co., Ltd. (“Jiangxi Yueshang”), an entity in which our chief executive officer, Mr. Gang Lai, owned 5% of its equity interests as of the date of that agreement. Pursuant to this purchase agreement, Jiangxi Yueshang will sell and we will purchase certain residential apartments and commercial office space totaling 2,749.30 square meters, with a total purchase price of RMB32 million (approximately $5.04 million). Pursuant to this purchase agreement, we were required to make a prepayment in the amount of 50% of the total purchase price, with 20% of the total purchase price payable when a certificate of occupancy is available to us, and 30% of the total purchase price payable upon delivery of the property. As of September 30, 2021, we had made a prepayment of RMB16 million ($2,476,800) to Jiangxi Yueshang and there was no additional significant payment to Jiangxi Yueshang during the six months ended March 31, 2022. As of the date of this report, we have not received the certificate of occupancy nor access to the property. The remaining balance is expected to be paid by August 2024.
As of March 31, 2022, we also had short-term bank loans of approximately $4.4 million that we obtained from Jiangxi Luling Rural Commercial Bank (“LRC Bank”) and Bank of Communications for working capital purposes. We expect that we will be able to renew all of the existing bank loans upon their maturity based on our past experiences and our outstanding credit history.
As of March 31, 2022, our working capital balance was $41.5 million. In assessing our liquidity, management monitors and analyzes our cash on-hand, our ability to generate sufficient revenue in the future, and our operating and capital expenditure commitments. We believe that our current cash and cash flows provided by operating activities, borrowings from banks and from our principal shareholders and proceeds received from the IPO will be sufficient to meet our working capital needs in the next 12 months from the date our unaudited condensed consolidated financial statements for the six months ended March 31, 2022 are released.
13
The following table sets forth summary of our cash flows for the periods indicated:
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash provided by operating activities | $ | 6,118,203 | $ | 1,058,129 | ||||
| Net cash used in investing activities | (55,091 | ) | (50,875 | ) | ||||
| Net cash provided by (used in) financing activities | (19,991 | ) | 24,136,556 | |||||
| Effect of exchange rate change on cash and restricted cash | 115,271 | 797,117 | ||||||
| Net increase in cash | 6,158,392 | 25,940,927 | ||||||
| Cash, beginning of period | 8,077,908 | 10,058,202 | ||||||
| Cash, end of period | $ | 14,236,300 | $ | 35,999,129 | ||||
Operating Activities
Net cash provided by operating activities was $6,118,203 for the six months ended March 31, 2022, primarily consisted of the following:
| ● | Net income of $1,731,735 for the period. |
| ● | A decrease in accounts receivable of $3,060,116. Our accounts receivable primarily includes balance due from customers for our pharmaceutical products sold and delivered to customers. As of March 31, 2022, most of our outstanding accounts receivable aged below six months. As of date of this filing, approximately 64.9%, or $12.2 million of our net accounts receivable balance as of March 31, 2022 have been subsequently collected. Collected accounts receivable will be used as working capital in our operations, if necessary. |
| ● | An increase in inventory balance of $860,517 because we increased the purchase of our raw material inventories and increased the purchase of finished goods inventory from third-party pharmaceutical companies in anticipation of increased sales in the coming months. |
| ● | A decrease in advance to suppliers of $2,664,149 because we made significant advance payments to suppliers for raw material purchase as of last fiscal year end and we received approximately $2.7 million purchased raw materials during the six months ended March 31, 2022. |
| ● | A decrease in prepayment for advertising of $7,593,960. In September 2021, we engaged a third-party advertising agency to develop and produce TV advertisement for promoting the sales of our major TCMD product, Bai Nian Dan and Guben Yanling Pill, and coordinate with a TV channel to broadcast the advertisement to targeted geographic market areas. Such prepayment has been charged to expense when our TV advertisement was first broadcasted in October 2021. |
| ● | A decrease in accounts payable of $1,751,013 because we made payment to raw material suppliers when we received the invoices from them. |
14
Net cash provided by operating activities was $1,058,129 for the six months ended March 31, 2021, primarily consisted of the following:
| ● | Net income of $7,147,798 for the period. |
| ● | An increase in accounts receivable of $6,322,074. Our accounts receivable primarily includes balance due from customers for our pharmaceutical products sold and delivered to customers. As of March 31, 2021, most of our outstanding accounts receivable aged below six months. As of date of this filing, our net accounts receivable balance as of March 31, 2021 have been fully collected. |
| ● | An increase in inventory balance of $2,864,911 because we increased raw material and finished goods inventory purchase in order to have sufficient inventory to fulfill increased sales orders based on current sales trend. In addition, in order to reduce the negative impact from general inflation and increased market price of raw materials, we increased the inventory stockpiles as of March 31, 2021. |
| ● | An increase in prepaid expenses and other current assets of $3,037,310 because we made an advance payment of RMB23.3 million (approximately $3 million) to a third-party vendor in order to purchase new equipment and machinery to upgrade some of our manufacturing facilities. The prepayment was paid to this vendor on March 15, 2021 and we had not received the equipment and machinery as of March 31, 2021. Subsequently in April 2021, we terminated the purchase agreement with this vendor and fully collected the RMB23.3 million prepayment. |
| ● | An increase in accounts payable of $5,801,410 because of our increased purchase of raw materials and third-party products from our suppliers, which led to increase in our accounts payable balance as of March 31, 2021. We normally arrange the payment to suppliers upon receipt of the invoices from them. As of March 31, 2021, the increase in accounts payable was largely due to pending invoices from suppliers. |
Investing Activities
Net cash used in investing activities amounted to $55,091 for the six months ended March 31, 2022, which primarily included the purchase of fixed assets of $55,629, offset by proceeds of $538 from disposal of certain equipment.
Net cash used in investing activities amounted to $50,875 for the six months ended March 31, 2021, which primarily included the purchase of fixed assets in the same amount.
Financing Activities
Net cash used in financing activities amounted to $19,991 for the six months ended March 31, 2022, primarily include the following:
| ● | Proceeds from short-term bank loans of $1,255,200 and repayment of bank loans of $1,255,200. |
| ● | Repayment of related party borrowings of $19,991. The balance due to related party mainly consisted of advances from our principal shareholders for working capital purposes during our normal course of business. These advances were non-interest bearing and due on demand. |
Net cash provided by financing activities amounted to $24,136,556 for the six months ended March 31, 2021, primarily include the following:
| ● | Proceeds from short-term bank loans of $1,220,800 and repayment of bank loans of $1,220,800. During the six months ended March 31, 2021, our subsidiary, Jiangxi Universe Pharmaceuticals Trade Co., Ltd., a PRC company formed in 2010 and a wholly-owned subsidiary of Jiangxi Universe (“Universe Trade”), repaid RMB8 million to LRC Bank upon maturity of a loan and at the same time renewed the loan agreement to borrow RMB8 million for an additional year until March 17, 2022. |
15
| ● | Net proceeds of approximately $22.0 million received from our IPO closed on March 25, 2021. Additional net proceeds of approximately $3.6 million from sale of the over-allotment shares on March 31, 2021 was subsequently received on April 1, 2021. As a result, our unaudited condensed balance sheet as of March 31, 2021 reported a subscription receivable of $3.6 million. |
| ● | Proceeds from related party borrowings of $2,194,640. The balance due to related party mainly consisted of advances from our principal shareholders for working capital purposes during our normal course of business. These advances were non-interest bearing and due on demand. |
Commitments and contingencies
From time to time, we are a party to various legal actions arising in the ordinary course of business. We accrue costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. For the six months ended March 31, 2022 and 2021, we did not have any material legal claims or litigation that, individually or in aggregate, could have a material adverse impact on our consolidated financial position, results of operations and cash flows.
As of March 31, 2022, we had the following contractual obligations:
| Payment Due by Period | ||||||||||||
| Contractual obligations | Total | Less than 1 year | 1-3 years | |||||||||
| Debt obligations (1) (2) (3) | $ | 4,410,000 | $ | 4,410,000 | $ | - | ||||||
| Total | $ | 4,410,000 | $ | 4,410,000 | $ | - | ||||||
| (1) | On June 16, 2021, the Company’s subsidiary, Jiangxi Universe, signed a loan agreement with LRC Bank to borrow RMB10 million (equivalent to $1,575,000) as working capital for one year, with the maturity date on June 15, 2022. The fixed interest rate of the loan was 4.81% per annum. There was no guarantee requirement for this loan. Upon maturity, the Company entered into a new loan agreement with LRC bank to extend the loan borrowing period for one year, with a new maturity date on June 14, 2023 and interest rate of 4.62% per annum. |
| (2) | On June 30, 2021, the Company’s subsidiary, Jiangxi Universe, signed a loan agreement with Bank of Communications to borrow RMB10 million (equivalent to $1,575,000) as working capital for one year, with the maturity date on June 18, 2022. The fixed interest rate of the loan was 4.5% per annum. Certain related parties of the Company, including Mr. Gang Lai, the Company’s controlling shareholder, Mr. Gang Lai’s spouse, Mrs. Xing Wu, and the Company’s subsidiary, Universe Trade, jointly signed guarantee agreements with Bank of Communications to provide credit guarantee for this loan. Upon maturity, the Company repaid the loan and entered into a new loan agreement with Bank of Communications to extend the loan borrowing period for one year, with a new maturity date on May 26, 2023 and interest rate of 4.2% per annum. |
| (3) | On March 18, 2021, the Company’s subsidiary, Universe Trade, signed a loan agreement with LRC Bank to borrow RMB8 million (equivalent to $1,260,000) as working capital for one year, with the maturity date on March 17, 2022. The fixed interest rate of the loan was 4.81% per annum. Upon maturity of this loan, Universe Trade entered into a loan extension agreement with the bank to extend the loan for one year, with a new maturity date on March 13, 2023 and interest rate of 4.81% per annum. There was no guarantee requirement for this loan. |
16
Trend Information
Other than as disclosed elsewhere in this filing, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of March 31, 2022 and September 30, 2021.
Inflation
Inflation does not materially affect our business or the results of our operations.
Seasonality
Seasonality does not materially affect our business or the results of our operations.
17
Exhibit 99.3
Universe Pharmaceuticals INC Reports Financial Results for The First Six Months of Fiscal Year 2022
Ji’an, Jiangxi, China, August 16, 2022 /PRNewswire/ -- Universe Pharmaceuticals INC (the “Company”) (Nasdaq: UPC), a pharmaceutical producer and distributor in China, today announced its unaudited financial results for the first six months of fiscal year 2022 ended March 31, 2022.
Mr. Gang Lai, Chairman and CEO of Universe Pharmaceuticals INC, commented, “During the first six months of fiscal year 2022, we have navigated business uncertainties and adjusted our business strategy to offset the impact of reduced product sales volume due to the resurgence of COVID-19 cases and related lockdowns. As a result, we generated $24.2 million in revenue for the six months ended March 31, 2022, slightly lower than the same period of last year, demonstrating the considerable efforts we made during this challenging period. To complement our offline sales channels, we established a strategic priority in developing online business channels, which helps us to seize the opportunity and is expected to drive our business growth in the fast-evolving market. Through executing our growth strategy of emphasizing digital marketing and expanding our sales on e-commerce platforms, we expect to improve our brand recognition, deliver products to more customers, and expand our business scale. Looking forward, we intend to continue implementing our expansion strategy, which we believe will allow us to achieve greater market penetration and expand our customer base, with the goal creating long-term value for our shareholders.”
Financial Highlights for the Six Months Ended March 31, 2022
| For the Six Months Ended March 31, | ||||||||||||
| ($ millions, except per share data) | 2022 | 2021 | % Change | |||||||||
| Revenues | 24.2 | 24.3 | -0.4 | % | ||||||||
| Income from operations | 2.7 | 9.6 | -71.8 | % | ||||||||
| Net income | 1.7 | 7.1 | -75.8 | % | ||||||||
| Earnings per share | 0.08 | 0.44 | -81.8 | % | ||||||||
| ● | Revenues slightly decreased by 0.4% to $24.2 million for the six months ended March 31, 2022 from $24.3 million for the six months ended March 31, 2021, primarily attributable to decreased sales volume of the Company’s traditional Chinese medicine derivatives (“TCMD”) products and third-party products by 2,454,463 units, or 17.3%, and the decreased average selling price of third-party products by $0.32 per unit, or 14.7%, partially offset by the increased average selling price of the Company’s TCMD products by $0.74 per unit, or 50.7%. | |
| ● | Income from operations was $2.7 million for the six months ended March 31, 2022, representing a decrease of 71.8% from an income from operations of $9.6 million for the six months ended March 31, 2021. | |
| ● | Net income was $1.7 million for the six months ended March 31, 2022, representing a decrease of 75.8% from a net income of $7.1 million for the six months ended March 31, 2021. | |
| ● | Earnings per share was $0.08 for the six months ended March 31, 2022, representing a decrease of 81.8% from earnings per share of $0.44 for the six months ended March 31, 2021. |
Financial Results for the Six Months Ended March 31, 2022 Compared to the Six Months Ended March 31, 2021
Revenues
Total revenues decreased by $0.1 million, or 0.4%, to $24.2 million for the six months ended March 31, 2022, from $24.3 million for the six months ended March 31, 2021.
| For the Six Months Ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||
| ($ millions) | Revenue | Cost of revenue | Gross margin | Revenue | Cost of revenue | Gross margin | ||||||||||||||||||
| TCMD products sales | 15.4 | 4.9 | 67.7 | % | 13.3 | 5.4 | 59.3 | % | ||||||||||||||||
| Third-party products sales | 8.8 | 5.5 | 37.9 | % | 11.0 | 6.9 | 37.2 | % | ||||||||||||||||
| Total | 24.2 | 10.4 | 56.8 | % | 24.3 | 12.3 | 49.3 | % | ||||||||||||||||
Sales of TCMD products increased by $2.1 million, or 15.3%, to $15.4 million for the six months ended March 31, 2022, from $13.3 million for the six months ended March 31, 2021. The increase in the sales of the TCMD products was due to an increase in the average selling price of the Company’s TCMD products by $0.74 per unit, or 50.7%, to $2.20 per unit in the six months ended March 31, 2022, from $1.46 per unit in the six months ended March 31, 2021.
Sales of third-party products decreased by $2.2 million, or 19.4%, to $8.8 million for the six months ended March 31, 2022, from $11.0 million for the six months ended March 31, 2021. Sales volume of third-party products slightly decreased by 5.6%, to 4,763,265 units sold in the six months ended March 31, 2022, from 5,043,984 units sold in the six months ended March 31, 2021. In the six months ended March 31, 2022, due to a change in product mix, the Company’s average selling price of third-party products decreased by $0.32 per unit, or 14.7%, to $1.86 per unit in the six months ended March 31, 2022, from $2.18 per unit in the six months ended March 31, 2021.
Cost of revenues and Gross profit
Cost of revenues decreased by $1.9 million, or 15.1%, to $10.4 million for the six months ended March 31, 2022, from $12.3 million for the six months ended March 31, 2021.
Gross profit increased by $1.8 million to $13.8 million for the six months ended March 31, 2022, from $12.0 million for the six months ended March 31, 2021. Gross margin increased by 7.5% to 56.8% for the six months ended March 31, 2022, from 49.3% for the six months ended March 31, 2021.
Operating expenses
Selling expenses increased by $7,970,484, or 718.5%, to $9,079,771 for the six months ended March 31, 2022, from $1,109,287 for the six months ended March 31, 2022, primarily attributable to (i) an increase in advertising expenses by $7,952,604, or 2,979.8%, from $266,884 in the six months ended March 31, 2021, to $ 8,219,488 in the six months ended March 31, 2022. In September 2021, the Company entered into an advertising service agreement with a third party, Guangdong Fengyang Legend Consulting Co., Ltd. (“Fengyang Legend”), pursuant to which, Fengyang Legend agreed to assist the Company in developing and producing a television advertisement for promoting the sales of the Company’s major TCMD products, Bai Nian Dan and Guben Yanling Pill, and coordinating with a TV channel to broadcast the advertisement to targeted geographic market areas. Pursuant to the terms of this agreement, the Company made an advance payment in the amount of 30% of the total advertising service fee to Fengyang Legend, and the Company paid Fengyang Legend another 58% of the total advertising service fee when the TV channel on which the advertisement is broadcasted was determined. Since the Company’s TV advertisement was first broadcasted in October 2021, the Company’s prepayment to Fengyang Legend has been charged to advertising expenses during the six months ended March 31, 2022, which led to higher advertising expenses in the six months ended March 31, 2022; (ii) an increase in the Company’s salary and benefit expenses paid to its sales employees by $35,852, or 8.7%, from $411,310 in the six months ended March 31, 2021 to $447,162 in the six months ended March 31, 2022, and an increase in business travel and meal expenses by $30,343, or 111.8%, from $27,145 in the six months ended March 31, 2021 to $57,488 in the six months ended March 31, 2022, primarily due to the Company’s increased sales activities during the six months ended March 31, 2022; and (iii) a decrease in shipping and delivery expenses by $45,538, or 11.6%, from $393,446 in the six months ended March 31, 2021 to $347,908 in the six months ended March 31, 2022, due to the Company’s decreased sales volume during the six months ended March 31, 2022.
2
General and administrative expenses increased by $845,425, or 85.8%, to $1,830,923 for the six months ended March 31, 2022 from $985,498 for the six months ended March 31, 2021, primarily attributable to (i) an increase in the Company’s office supply and utility expenses by $104,770, or 69.4%, to support its administration activities; (ii) an increase in the Company’s salaries, welfare expenses and insurance expenses paid to administration employees by $37,911, or 12.3%, because of a higher amount of annual bonus distributed to administrative staffs in the six months ended March 31, 2022 as compared to the six months ended March 31, 2021, and (iii) an increase in bad debt expense by $688,064, or 338.5%, because the Company accrued more bad debt expenses based on its assessment of the collectability of the accounts receivable and advance to suppliers, offset by a decrease in consulting fees by $46,700 because the Company incurred higher amount of consulting services fees in the six months ended March 31, 2021 before the Company completed its initial public offering (the “IPO”).
Research and development expenses decreased by $166,207, or 53.5%, to $144,461 for the six months ended March 31, 2022, from $310,668 for the six months ended March 31, 2021, primarily attributable to a decrease in the materials used in the research and development activities.
Other income (expenses), net
Total other expenses, net, increased by $632,947, or 2,607.7%, to $608,675 for the six months ended March 31, 2022 from $24,272 for the six months ended March 31, 2021.
Provision for income taxes
Provision for income taxes was $1.6 million for the six months ended March 31, 2022, representing a decrease of $0.8 million, or 34.5%, from $2.4 million for the six months ended March 31, 2021 due to the Company’s decreased taxable income.
Net income
Net income was $1.7 million for the six months ended March 31, 2022, representing a $5.4 million decrease from a net income of $7.1 million for the six months ended March 31, 2021.
Basic and diluted earnings per share were $0.08 for the six months ended March 31, 2022, representing a decrease of 81.8% from basic and diluted earnings per share of $0.44 for the six months ended March 31, 2021.
Balance Sheet
As of March 31, 2022, the Company had cash of $14.2 million, as compared to $8.1 million as of September 30, 2021.
Cash Flow
Net cash provided by operating activities was $6.1 million for the six months ended March 31, 2022, compared with $1.1 million for the six months ended March 31, 2021.
Net cash used in investing activities was $55,091 for the six months ended March 31, 2022, compared with $50,875 for the six months ended March 31, 2021.
Net cash used in financing activities was $19,991 for the six months ended March 31, 2022, compared with net cash provided by financing activities of $24,136,556 for the six months ended March 31, 2021.
3
About Universe Pharmaceuticals INC
Universe Pharmaceuticals INC, headquartered in Ji’an, Jiangxi, China, is a pharmaceutical producer and distributor in China. The Company specializes in the manufacturing, marketing, sales and distribution of traditional Chinese medicine derivatives products targeting the elderly with the goal of addressing their physical conditions in the aging process and to promote their general well-being. The Company also distributes and sells biomedical drugs, medical instruments, Traditional Chinese Medicine Pieces, and dietary supplements manufactured by third-party pharmaceutical companies. Currently, the Company’s products are sold in 30 provinces of China. For more information, visit the company’s website at http://www.universe-pharmacy.com/.
Forward-Looking Statements
All statements other than statements of historical fact in this announcement are forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations and projections about future events and financial trends that the Company believes may affect its financial condition, results of operations, business strategy and financial needs. Investors can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. The Company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or changes in its expectations, except as may be required by law. Although the Company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that such expectations will turn out to be correct, and the Company cautions investors that actual results may differ materially from the anticipated results and encourages investors to review other factors that may affect its future results in the Company’s registration statement and in its other filings with the U.S. Securities and Exchange Commission.
For more information, please contact:
Ascent Investors Relations LLC
Tina Xiao
President
Phone: 917-609-0333
Email: tina.xiao@ascent-ir.com
4
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | ||||||||
| March 31, | September 30 | |||||||
| ASSETS | 2022 | 2021 | ||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 14,236,300 | $ | 8,077,908 | ||||
| Short-term investments | 14,344,092 | 13,725,204 | ||||||
| Accounts receivable, net | 18,816,406 | 15,573,742 | ||||||
| Inventories, net | 3,385,872 | 2,462,542 | ||||||
| Due from related parties | 356,290 | 236,982 | ||||||
| Advance to suppliers | 103,653 | 2,738,313 | ||||||
| Prepayment for advertising | - | 7,492,320 | ||||||
| Prepaid expenses and other current assets | 418,170 | 174,053 | ||||||
| TOTAL CURRENT ASSETS | 51,660,783 | 50,481,064 | ||||||
| Property, plant and equipment, net | 4,985,035 | 4,681,353 | ||||||
| Prepayments made to a related party for purchase of property | 2,520,000 | 2,476,800 | ||||||
| Prepayments for construction in progress | 10,448,944 | 10,712,160 | ||||||
| Intangible assets, net | 178,764 | 178,483 | ||||||
| Investment in equity securities | 586,674 | 744,924 | ||||||
| Deferred tax assets | 985,961 | 869,997 | ||||||
| TOTAL NONCURRENT ASSETS | 19,705,378 | 19,663,717 | ||||||
| TOTAL ASSETS | $ | 71,366,161 | $ | 70,144,781 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term bank loans | $ | 4,410,000 | $ | 4,334,400 | ||||
| Accounts payable | 3,645,443 | 5,310,526 | ||||||
| Taxes payable | 962,790 | 1,101,460 | ||||||
| Due to related parties | 7,293 | 19,723 | ||||||
| Accrued expenses and other current liabilities | 1,182,353 | 444,319 | ||||||
| TOTAL CURRENT LIABILITIES | 10,207,879 | 11,210,428 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares, $0.003125 par value, 100,000,000 shares authorized, 21,750,000 shares and 21,750,000 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively | 67,969 | 67,969 | ||||||
| Additional paid-in capital | 29,279,159 | 29,279,159 | ||||||
| Statutory reserves | 2,439,535 | 2,439,535 | ||||||
| Retained earnings | 26,790,666 | 25,058,931 | ||||||
| Accumulated other comprehensive income | 2,580,953 | 2,088,759 | ||||||
| TOTAL SHAREHOLDERS’ EQUITY | 61,158,282 | 58,934,353 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 71,366,161 | $ | 70,144,781 | ||||
5
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUE | $ | 24,202,340 | $ | 24,292,948 | ||||
| COST OF REVENUE AND RELATED TAX | 10,445,906 | 12,304,678 | ||||||
| GROSS PROFIT | 13,756,434 | 11,988,270 | ||||||
| OPERATING EXPENSES | ||||||||
| Selling expenses | 9,079,771 | 1,109,287 | ||||||
| General and administrative expenses | 1,830,923 | 985,498 | ||||||
| Research and development expenses | 144,461 | 310,668 | ||||||
| Total operating expenses | 11,055,155 | 2,405,453 | ||||||
| INCOME FROM OPERATIONS | 2,701,279 | 9,582,817 | ||||||
| OTHER INCOME (EXPENSES) | ||||||||
| Interest expense, net | (88,389 | ) | (46,671 | ) | ||||
| Other income (expense), net | 634 | (8,227 | ) | |||||
| Short-term investment income | 696,430 | - | ||||||
| Equity investment income | - | 30,626 | ||||||
| Total other income (expense), net | 608,675 | (24,272 | ) | |||||
| INCOME BEFORE INCOME TAX PROVISION | 3,309,954 | 9,558,545 | ||||||
| PROVISION FOR INCOME TAXES | 1,578,219 | 2,410,747 | ||||||
| NET INCOME | 1,731,735 | 7,147,798 | ||||||
| OTHER COMPREHENSIVE INCOME | ||||||||
| Foreign currency translation adjustment | 492,194 | 797,643 | ||||||
| COMPREHENSIVE INCOME | $ | 2,223,929 | $ | 7,945,441 | ||||
| Earnings per common share - basic and diluted | $ | 0.08 | $ | 0.44 | ||||
| Weighted average shares - basic and diluted | $ | 21,750,000 | $ | 16,168,956 | ||||
6
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 1,731,735 | $ | 7,147,798 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 292,111 | 243,466 | ||||||
| Loss from disposal of fixed assets | 1,011 | - | ||||||
| Changes in allowance for doubtful accounts | 100,406 | (203,253 | ) | |||||
| Changes in inventory reserve | (16,508 | ) | (76,734 | ) | ||||
| Deferred income tax provision (benefit) | (100,406 | ) | 71,221 | |||||
| Short-term investment income | (696,430 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (3,060,116 | ) | (6,322,074 | ) | ||||
| Inventories | (860,517 | ) | (2,864,911 | ) | ||||
| Advance to suppliers, net | 2,664,149 | - | ||||||
| Prepayment for advertising | 7,593,960 | - | ||||||
| Advances to related parties | (110,241 | ) | - | |||||
| Prepaid expenses and other current assets | (240,164 | ) | (3,098,993 | ) | ||||
| Accounts payable | (1,751,013 | ) | 5,801,410 | |||||
| Taxes payable | (157,280 | ) | 55,105 | |||||
| Accrued expenses and other current liabilities | 727,506 | 305,094 | ||||||
| Net cash provided by operating activities | 6,118,203 | 1,058,129 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (55,629 | ) | (50,875 | ) | ||||
| Proceeds from disposal of equipment | 538 | - | ||||||
| Net cash used in investing activities | (55,091 | ) | (50,875 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term bank loans | 1,255,200 | 1,220,800 | ||||||
| Repayment of bank loans | (1,255,200 | ) | (1,220,800 | ) | ||||
| Net proceeds from initial public offerings | - | 21,941,916 | ||||||
| Proceeds from (repayment of) related party borrowings | (19,991 | ) | 2,194,640 | |||||
| Net cash provided by (used in) financing activities | (19,991 | ) | 24,136,556 | |||||
| Effect of changes of foreign exchange rates on cash | 115,271 | 797,117 | ||||||
| Net increase in cash | 6,158,392 | 25,940,927 | ||||||
| Cash, beginning of period | 8,077,908 | 10,058,202 | ||||||
| Cash, end of period | $ | 14,236,300 | $ | 35,999,129 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | 103,765 | $ | 65,775 | ||||
| Cash paid for income tax | $ | 1,880,314 | $ | 3,364,769 | ||||
| Supplemental non-cash financing activity: | ||||||||
| Subscription receivable from issuance of ordinary shares under initial public offerings | $ | - | $ | 3,571,241 | ||||
| Cost of construction in progress paid in prior years | $ | 448,342 | $ | - | ||||
7