Universe Pharmaceuticals INC 6-K, filed Aug 31, 2023
Universe Pharmaceuticals INC (UPC)
About this 6-K
Universe Pharmaceuticals INC filed this 6-K on August 31, 2023.
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
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 ☐
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 March 31, 2023 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) | Interactive Data File disclosure as Exhibit 101 in accordance with Rule 405 of Regulation S-T. |
This current report on Form 6-K is being incorporated by reference into the Form F-3 of the Registrant (File No. 333-268028), declared effective by the U.S. Securities and Exchange Commission on November 15, 2022.
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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.
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EXHIBIT INDEX
Exhibit No. |
Description | |
| 99.1 | Unaudited Consolidated Financial Statements and Related Notes As of March 31, 2023 and for the Six Months Ended March 31, 2023 and 2022 | |
| 99.2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| 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). | |
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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 31, 2023 | By: | /s/ Gang Lai |
| Gang Lai | ||
| Chief Executive Officer | ||
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Exhibit 99.1
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | ||||||||
| March 31, 2023 | September 30, 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Advance to suppliers | ||||||||
| Prepayment for acquisition | ||||||||
| 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 SHAREHOLDERS’ 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 reserve | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
| * |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
| For the Six Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| 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 (LOSS) FROM OPERATIONS | | |||||||
| OTHER INCOME (EXPENSES) | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Other income, net | ||||||||
| Short-term investment income | ||||||||
| Total other income, net | | |||||||
| INCOME (LOSS) BEFORE INCOME TAX PROVISION | ||||||||
| PROVISION FOR INCOME TAXES | ||||||||
| NET INCOME (LOSS) | ( | ) | | |||||
| OTHER COMPREHENSIVE INCOME | ||||||||
| Foreign currency translation adjustment | | |||||||
| COMPREHENSIVE INCOME | $ | $ | ||||||
| $ | ( | ) | $ | |||||
| $ | | $ | | |||||
| * |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2023 AND 2022
(UNAUDITED)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Ordinary Share | Paid in | Statutory | Retained | Comprehensive | ||||||||||||||||||||||||
| Shares * | Amount | Capital | Reserve | Earnings | Income | Total | ||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Net income | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| * |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| 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 | ( | ) | ( | ) | ||||
| 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: | ||||||||
| Cost of construction in progress paid in prior years | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BUSINESS DESCRIPTION
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”).
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 the Company’s legal structure (the “Reorganization”) was completed on December 11, 2019. The Reorganization involved
the incorporation of Universe INC and Universe Technology, and the transfer of
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 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
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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, 2023 and as of the date of this report, Universe Hanhe has no active business operations.
On July 27, 2023, the
Company completed a share consolidation of six (6) ordinary shares with par value of $
| Date of | Place of | % of | ||||||
| Name of Entity | Incorporation | Incorporation | 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.
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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.
Risks and Uncertainties
The business operations of the Company are mainly 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.
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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 of 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, 2023 and September 30, 2022, no allowance for doubtful accounts was deemed necessary, as the Company believes that all advances to suppliers are fully realizable.
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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 condensed unaudited 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, 2023 and September 30, 2022 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 Accounting Standards Codification (“ASC”) 321, “Investments—Equity Securities” (“ASC 321”), which also approximates its recorded value.
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Property, plant and equipment
| 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 consolidated statements of income and other comprehensive income in other income or expenses.
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, 2023 and 2022.
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.
| 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, 2023 and 2022.
10
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, 2023 and September 30, 2022.
Investments in Equity Securities
The Company
accounts for its equity investments in accordance with 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, 2023 and September 30, 2022, the Company’s investment in JX RBC Bank amounted to $
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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, 2023 and September 30, 2022.
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”).
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, 2023 and September 30, 2022, the Company did not have contract assets and contract liabilities.
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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, 2023 and 2022 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 of employee costs, internal and external costs
related to execution of studies, 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, 2023
and 2022, total research and development expenses 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 17).
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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 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
The Company’s operating subsidiaries in China are subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the six months ended March 31, 2023 and 2022. As of March 31, 2023 and September 30, 2022, all of the tax returns of the Company’s PRC subsidiaries remained 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, 2023 and 2022, there were no dilutive shares.
14
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.
| For the Six Months Ended March 31, |
For the Year Ended September 30, |
||||||
| 2023 | 2022 | 2022 | |||||
| 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.
15
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 $
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses” (Topic 326), which will require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Subsequently, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are within the scope of lease accounting standards. Further, the FASB issued ASU No. 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2020-02 to provide additional guidance on the credit losses standard. For all other entities, the amendments for ASU 2016-13 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Adoption of the ASUs is on a modified retrospective basis. The Company adopted ASU 326 effective October 1, 2022, the first day of the Company’s fiscal year ending September 30, 2023. The adoption of ASU 326 did not have a material impact on the Company’s financial position, results of operations or cash flows.
Other accounting standards that have been issued by FASB that do not require adoption until a future date are not expected to have a material impact on the unaudited condensed consolidated financial statements upon adoption. The Company does not discuss recent standards that are not anticipated to have an impact on or are unrelated to its unaudited condensed consolidated financial condition, results of operations, cash flows or disclosures.
NOTE 3 — ACCOUNTS RECEIVABLE, NET
| March 31, 2023 | September 30, 2022 | |||||||
| 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
16
| March 31, 2023 | September 30, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Additions | ||||||||
| Bad debt recovery | ||||||||
| Foreign currency translation adjustments | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
NOTE 4 — INVENTORY, NET
| March 31, 2023 | September 30, 2022 | |||||||
| 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, 2023 and 2022, recovery of previously accrued inventory
allowance amounted to $
NOTE 5 — ADVANCE TO SUPPLIERS
| March 31, 2023 | September 30, 2022 | |||||||
| 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 of raw materials.
17
NOTE 6 — PREPAYMENT FOR ACQUISITION
On
September 26, 2022, the Company entered into a letter of intent for an equity transfer with an individual, Mr. Xibo Liu, pursuant to
which, Mr. Xibo Liu transfers his
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.
| March 31, 2023 | September 30, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Accrued investment income (loss) | ( | ) | ||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Ending balance of short-term investments | $ | $ | ||||||
Investment
income generated from such short-term investments amounted to $
NOTE 8 — PROPERTY, PLANT AND EQUIPMENT, NET
| Useful life | March 31, 2023 | September 30, 2022 | ||||||||
| Buildings | $ | $ | ||||||||
| Machinery and equipment | ||||||||||
| Automobiles | ||||||||||
| Office and electric equipment | ||||||||||
| Subtotal | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
Depreciation
expense was $
18
NOTE 9 — INTANGIBLE ASSETS, NET
| Useful life | March 31, 2023 | September 30, 2022 | ||||||||
| Land use rights | $ | $ | ||||||||
| Software | ||||||||||
| Total | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangible assets, net | $ | $ | ||||||||
Amortization
expense was $
| Twelve months ending March 31, | Amortization expense | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ | ||||
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 agreed to help the Company construct four manufacturing plant buildings and an office building with a
total estimated budget of RMB
As
of March 31, 2023 and September 30, 2022, $
As
of March 31, 2023, future additional capital expenditure on this CIP project is estimated to be approximately RMB
19
| Twelve months ending March 31, | Capital on CIP | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total | $ | |||
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, 2023, the Company had made a prepayment of RMB
NOTE 12 — SHORT-TERM BANK LOANS
| Note | March 31, 2023 | September 30, 2022 | ||||||||
| Short-term bank loans: | ||||||||||
| Loans payable to Jiangxi Luling Rural Commercial Bank (“LRC Bank”): | ||||||||||
| Maturity date on | (1) | |||||||||
| Maturity date on | (2) | |||||||||
| Loan payable to Bank of Communications Co., Ltd | ||||||||||
| Maturity date on | (3) | |||||||||
| Total short-term loans | $ | $ | ||||||||
| (1) |
| (2) |
| (3) |
For
the above-mentioned loans, the Company recorded a total interest expense of $
20
NOTE 13 — RELATED PARTY TRANSACTIONS
(a)
| Name | Relationship with the Company | |
| Mr. Gang Lai | ||
| Ms. Lin Yang | ||
| Ms. Xing Wu | ||
| Foshan Shangyu Investment Holding Co., Ltd (“Foshan Shangyu”) |
(b)
| Name | March 31, 2023 | September 30, 2022 | ||||||
| Mr. Gang Lai | $ | $ | ||||||
| Total due to related parties | $ | $ | ||||||
As of March 31, 2023 and September 30, 2022, the balance due to related parties mainly consisted of advances from the Company’s officers for working capital purposes during the Company’s normal course of business. These advances are non-interest bearing and due on demand.
(c) Loan guarantee provided by related parties
In connection with the Company’s bank borrowings from LRC Bank, certain related parties of the Company, including Mr. Gang Lai, the Company’s controlling shareholder, chairman of the board of directors, and chief executive officer, Ms. Lin Yang, the Company’s chief financial officer, Ms. Xing Wu, Mr. Gang Lai’s spouse, and the Company’s WFOE, Universe Technology, jointly signed guarantee agreements with LRC Bank to provide credit guarantee for this loan. (see Note 12).
21
(d) Prepayment to related party for property purchase
On
January 13, 2022, Mr. Gang Lai transferred the
NOTE 14 — CONCENTRATIONS
A majority of the Company’s revenue and expense transactions are denominated in RMB and a significant portion of the Company’s 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, 2023 and September 30, 2022, $
For
the six months ended March 31, 2023, one customer accounted for
Sales
of one of the Company’s major products, Guben Yanling Pill, accounted for
As
of March 31, 2023, one customer accounted for
As
of March 31, 2023, three suppliers accounted for
For
the six months ended March 31, 2023, one supplier accounted for
22
NOTE 15 — 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 upon
incorporation was
Initial Public Offering
On
March 25, 2021, the Company closed its IPO of
Share consolidation
On
July 27, 2023, the Company completed a share consolidation of
As
of March 31, 2023 and September 30, 2022, the Company had a 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
$
23
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
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, 2023 and September
30, 2022, the restricted amounts as determined pursuant to PRC statutory laws totaled $
NOTE 16 — 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, 2023 and 2022, 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, 2023, future minimum
capital expenditures on the Company’s CIP project amounted to approximately $
24
On
May 6, 2021, the Company entered into a real estate property purchase agreement with Jiangxi Yueshang, an entity in which the Company’s
chief executive officer, Mr. Gang Lai, owned
NOTE 17 — 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 one reporting segment. The Company develops, manufactures and sells 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 manufactured by third-party pharmaceutical companies. All of these products are currently sold in China.
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 one reporting segment.
| For the six months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Sales of TCMD products manufactured by the Company | $ | $ | ||||||
| Sales of third-party products | ||||||||
| Total revenue | $ | $ | ||||||
Revenue by product categories
| For the six months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| 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 | ||||||||
| Subtotal of third-party products sales | ||||||||
| Total revenue | $ | $ | ||||||
25
NOTE 18 — SUBSEQUENT EVENTS
On April 24, 2023, Mr. David Sherman, a director of the Company, notified the Company of his resignation as a director of the Company and the chairman of the audit committee of the board of directors, effective May 2, 2023.
On May 3, 2023, the Company’s board of directors appointed Mr. Yongping Yu as a director of the Company and the chairman of the nominating and corporate governance committee.
On May 5, 2023, a subsidiary
of the Company, Jiangxi Universe, entered into a loan agreement with Zhujiang Rural Bank to borrow RMB
On July 18, 2023, a subsidiary
of the Company, Jiangxi Universe, entered into a loan agreement with Beijing Bank to borrow RMB
On
August 8, 2023, the Company issued
NOTE 19 — 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, 2023 and September 30, 2022, 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.
26
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
PARENT COMPANY BALANCE SHEETS
(UNAUDITED)
| March 31, 2023 | September 30, 2022 | |||||||
| 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 | $ | $ | ||||||
| * |
27
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
PARENT COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
| For the six months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| 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 | $ | $ | ||||||
28
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
PARENT COMPANY STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the six months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| 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: | ||||||||
| 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 | $ | $ | ||||||
29
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 unaudited condensed 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, 2022, particularly under the caption “Item 3. Key Information—D. Risk Factors.”
Overview
Through its subsidiaries (the “PRC operating entities”) in the People’s Republic of China (“China” or the “PRC”), Universe Pharmaceuticals INC (the “Company,” “we,” “our” and “us”) is 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 report. 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.
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 sales volume, selling price, and mix of products sold.
| For the Six Months Ended March 31, | Variance | |||||||||||
| 2023 | 2022 | % | ||||||||||
| Revenue from sales of self-manufactured TCMD products | 50.8 | % | 63.4 | % | 12.6 | % | ||||||
| Revenue from sales of third-party products | 49.2 | % | 36.6 | % | (12.6 | )% | ||||||
| Total revenue | 100.0 | % | 100.0 | % | ||||||||
| Sales volume by unit- TCMD products | 7,961,244 | 6,966,256 | 14.3 | % | ||||||||
| Sales volume by unit- third party products | 5,727,501 | 4,763,265 | 20.2 | % | ||||||||
| Total sales volume | 13,688,745 | 11,729,521 | 16.7 | % | ||||||||
| Average selling price per unit- TCMD products | $ | 1.18 | $ | 2.20 | (46.4 | )% | ||||||
| Average selling price per unit- Third-party products | $ | 1.59 | $ | 1.86 | (14.5 | )% | ||||||
Revenues from sales of TCMD products manufactured by us accounted for 50.8% and 63.4% of our total revenues for the six months ended March 31, 2023 and 2022, 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 (the “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.
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.
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 66.8% and 43.2% of our total revenue for the six months ended March 31, 2023 and 2022, respectively. We expect our cost of revenues to increase as we further expand our operations in the foreseeable future.
2
Our gross margin was 33.2% for the six months ended March 31, 2023, a decrease by 23.6% from the gross margin of 56.8% in the six months ended March 31, 2022, due to decrease in the average selling price of our TCMD products and third-party products by 46.4% and 14.5%, respectively. Slowdown in the Chinese economy caused by the COVID-19 pandemic has led to a decline in customers’ spending power, and we changed our pricing strategy to increase sales volume and market share during this challenging period.
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 12.6% and 37.5% of our total revenue for the six months ended March 31, 2023 and 2022, 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 7.5% and 7.6% of our revenue for the six months ended March 31, 2023 and 2022, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, 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 12.3% and 0.6% of our revenue for the six months ended March 31, 2023 and 2022 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.
3
Financial Results for the Six Months Ended March 31, 2023 Compared to the Six Months Ended March 31, 2022
The following table summarizes the results of our operations during the six months ended March 31, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
| For the Six Months Ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | Variance | ||||||||||||||||||||||
| Amount | % of revenue | Amount | % of revenue | Amount | % | |||||||||||||||||||
| REVENUE | $ | 18,467,186 | 100.0 | % | $ | 24,202,340 | 100.0 | % | $ | (5,735,154 | ) | (23.7 | )% | |||||||||||
| COST OF REVENUE | 12,339,044 | 66.8 | % | 10,445,906 | 43.2 | % | 1,893,138 | 18.1 | % | |||||||||||||||
| GROSS PROFIT | 6,128,142 | 33.2 | % | 13,756,434 | 56.8 | % | (7,628,292 | ) | (55.5 | )% | ||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||
| Selling expenses | 2,330,508 | 12.6 | % | 9,079,771 | 37.5 | % | (6,749,263 | ) | (74.3 | )% | ||||||||||||||
| General and administrative expenses | 1,380,053 | 7.5 | % | 1,830,923 | 7.6 | % | (450,870 | ) | (24.6 | )% | ||||||||||||||
| Research and development expenses | 2,268,335 | 12.3 | % | 144,461 | 0.6 | % | 2,123,874 | 1,470.2 | % | |||||||||||||||
| Total operating expenses | 5,978,896 | 32.4 | % | 11,055,155 | 45.7 | % | (5,076,259 | ) | (45.9 | )% | ||||||||||||||
| INCOME FROM OPERATIONS | 149,246 | 0.8 | % | 2,701,279 | 11.2 | % | (2,552,033 | ) | (94.5 | )% | ||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||
| Interest expense, net | (74,569 | ) | (0.4 | )% | (88,389 | ) | (0.4 | )% | 13,820 | (15.6 | )% | |||||||||||||
| Other income, net | 17,323 | 0.1 | % | 634 | 0.0 | % | 16,689 | 2,632.3 | % | |||||||||||||||
| Equity investment income | 166,931 | 0.9 | % | 696,430 | 2.9 | % | (529,499 | ) | (76.0 | )% | ||||||||||||||
| Total other income, net | 109,685 | 0.6 | % | 608,675 | 2.5 | % | (498,990 | ) | (82.0 | )% | ||||||||||||||
| INCOME BEFORE INCOME TAX PROVISION | 258,931 | 1.4 | % | 3,309,954 | 13.7 | % | (3,051,023 | ) | (92.2 | )% | ||||||||||||||
| PROVISION FOR INCOME TAXES | 974,358 | 5.3 | % | 1,578,219 | 6.5 | % | (603,861 | ) | (38.3 | )% | ||||||||||||||
| NET INCOME | $ | (715,427 | ) | (3.9 | )% | $ | 1,731,735 | 7.2 | % | $ | (2,447,162 | ) | (141.3 | )% | ||||||||||
4
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, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
| Amount | Amount | Amount | % | |||||||||||||
| Revenue - TCMD products sales | $ | 9,374,312 | $ | 15,354,635 | $ | (5,980,323 | ) | (38.9 | )% | |||||||
| Revenue – third-party products sales | 9,092,874 | 8,847,705 | 245,169 | 2.8 | % | |||||||||||
| Total revenue | $ | 18,467,186 | $ | 24,202,340 | $ | (5,735,154 | ) | (23.7 | )% | |||||||
Our revenues decreased by $5,735,154, or 23.7%, to $18,467,186 for the six months ended March 31, 2023, from $24,202,340 for the six months ended March 31, 2022.
Revenue from sales of our TCMD products
Sales of TCMD products decreased by $5,980,323, or 38.9%, to $9,374,312 for the six months ended March 31, 2023, from $15,354,635 for the six months ended March 31, 2022. The decrease in the sales of our TCMD product was due to the following specific reasons:
| a) | Slowdown in economy caused by the COVID-19 pandemic has led to a decline in customers’ spending power, and we changed our pricing strategy to increase sales volume and market share during this challenging period. Average selling price of our TCMD products decreased by $1.02 per unit, or 46.4%, to $1.18 per unit in the six months ended March 31, 2023, from $2.20 per unit in the six months ended March 31, 2022. |
| b) | As a result of our new pricing strategy, sales volume of TCMD products increased by 14.3%, to 7,961,244 units sold in the six months ended March 31, 2023, from 6,966,256 units sold in the six months ended March 31, 2022. |
| c) | The exchange rate between RMB and US$ was US$1.00 to RMB6.3717 in the six months ended March 31, 2022 as compared to US$1.00 to RMB6.9761 in the six months ended March 31, 2023. The depreciation of RMB against US$ had a 9.5% negative impact on our reported revenues. |
Revenue from sales of third-party products
Sales of third-party products slightly increased by $245,169, or 2.8%, to $9,092,874 for the six months ended March 31, 2023, from $8,847,705 for the six months ended March 31, 2022. Sales volume of third-party products increased by 20.2%, to 5,727,501 units sold in the six months ended March 31, 2023, from 4,763,265 units sold in the six months ended March 31, 2022. Average selling price of third-party products decreased by $0.27 per unit, or 14.5%, to $1.59 per unit in the six months ended March 31, 2023, from $1.86 per unit in the six months ended March 31, 2022, due to a change in our pricing strategy and the 9.5% negative impact from foreign currency fluctuation as discussed above.
5
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, and the purchase price of third-party products, and as the customer and product mix changes.
| For the six months ended March 31, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
| Amount | Amount | Amount | % | |||||||||||||
| Cost of revenue- TCMD products | $ | 6,617,444 | $ | 4,953,950 | $ | 1,663,494 | 33.6 | % | ||||||||
| Cost of revenue- third-party products | 5,721,600 | 5,491,956 | 229,644 | 4.2 | % | |||||||||||
| Total cost of revenue | $ | 12,339,044 | $ | 10,445,906 | $ | 1,893,138 | 18.1 | % | ||||||||
Cost of revenues increased by $1,893,138, or 18.1%, to $12,339,044 for the six months ended March 31, 2023, from $10,445,906 for the six months ended March 31, 2022, due to an increase in sales volume and rising prices of traditional Chinese medicine raw materials caused by the imbalance between supply and demand starting from the fourth quarter of 2022.
Cost of revenues of TCMD products
Cost of revenues of TCMD products accounted for 53.6% and 47.4% of our total costs of revenues for the six months ended March 31, 2023 and 2022, respectively. Cost of revenues of TCMD products increased by $1,663,494, or 33.6%, from $4,953,950 in the six months ended March 31, 2022 to $6,617,444 in the six months ended March 31, 2023. The increase in cost of revenues of our TCMD products was due to the following reasons:
| (1) | As a result of our new pricing strategy to promote sales, sales volume of TCMD products increased by 14.3%, to 7,961,244 units sold in the six months ended March 31, 2023, from 6,966,256 units sold in the six months ended March 31, 2022. |
| (2) | A severe drought in the Yangtze River Basin in China in 2022 led to a decrease in the supply of traditional Chinese medicinal materials, and the COVID-19 pandemic resulted in increased demand of traditional Chinese medicinal materials for recuperating and improving immunity. Due to imbalance between supply and demand starting from the fourth quarter of 2022, prices of the traditional Chinese medicine raw materials increased by about 19% for the six months ended march 31, 2023 as compared to the six months ended March 31, 2022. Average unit cost of our TCMD products increased by $0.12, or 16.9%, from $0.71 per unit in the six months ended March 31, 2022 to $0.83 per unit in the six months ended March 31, 2023. |
| (3) | The exchange rate between RMB and US$ was US$1.00 to RMB6.3717 in the six months ended March 31, 2022 as compared to US$1.00 to RMB6.9761 in the six months ended March 31, 2023. The depreciation of RMB against US$ had a 9.5% negative impact on our cost of revenue. |
Cost of revenues of third-party products
Cost of revenues of third-party products accounted for 46.4% and 52.6% of our total costs of revenues for the six months ended March 31, 2023 and 2022, respectively. Cost of revenues of third-party products increased by $229,644, or 4.2%, from $5,491,956 in the six months ended March 31, 2022 to $5,721,600 in the six months ended March 31, 2023, because of increase in sales volume of third-party products by 20.2% from 4,763,265 units sold in the six months ended March 31, 2022 to 5,727,501 units sold in the six months ended March 31, 2023. Average unit cost of third-party products decreased by $0.15 per unit, or 13.0%, from $1.15 per unit in the six months ended March 31, 2022 to $1.00 per unit in the six months ended March 31, 2023, due to change in product mix and the 9.5% negative impact from foreign currency fluctuation as discussed above.
6
Gross profit
Our gross profit decreased by $7,628,292 to $6,128,142 for the six months ended March 31, 2023, from $13,756,434 for the six months ended March 31, 2022. Our margin decreased by 23.6% to 33.2% for the six months ended March 31, 2023, from 56.8% for the six months ended March 31, 2022.
| For the six months ended March 31, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
| Amount | Amount | Amount | % | |||||||||||||
| Gross profit- TCMD products | $ | 2,756,868 | $ | 10,440,685 | $ | (7,643,817 | ) | (73.5 | )% | |||||||
| Gross profit- third-party products | 3,371,274 | 3,355,749 | 15,525 | 0.5 | % | |||||||||||
| Total gross profit | $ | 6,128,142 | $ | 13,756,434 | $ | (7,628,292 | ) | (55.5 | )% | |||||||
| Gross margin- TCMD products | 29.4 | % | 67.7 | % | (38.3 | )% | ||||||||||
| Gross margin- third party products | 37.1 | % | 37.9 | % | (0.8 | )% | ||||||||||
| Total gross margin | 33.2 | % | 56.8 | % | (23.7 | )% | ||||||||||
| Average selling price per unit- TCMD products | $ | 1.18 | $ | 2.20 | $ | (1.02 | ) | (46.4 | )% | |||||||
| Average cost per unit- TCMD products | $ | 0.83 | $ | 0.71 | $ | 0.12 | 16.9 | % | ||||||||
| Average selling price per unit- third party products | $ | 1.59 | $ | 1.86 | $ | (0.27 | ) | (14.5 | )% | |||||||
| Average cost per unit - third party products | $ | 1.00 | $ | 1.15 | $ | (0.15 | ) | (13.0 | )% | |||||||
Gross profit from the sales of our TCMD products decreased by $7,643,817, or 73.5%, from $10,400,685 in the six months ended March 31, 2022 to $2,756,868 in the six months ended March 31, 2023, and the gross margin of our TCMD products decreased by 38.3 percentage point, from 67.7% in the six months ended March 31, 2022 to 29.4% in the six months ended March 31, 2023. The decrease in our gross profit from the sales of TCMD products was due to the following reasons: (i) as discussed above, we changed our pricing strategy to promote sales, and average selling price of our TCMD products decreased by $1.02 per unit, or 46.4%, to $1.18 per unit in the six months ended March 31, 2023, from $2.20 per unit in the six months ended March 31, 2022; (ii) average unit cost of our TCMD products increased by $0.12, or 16.9%, from $0.71 per unit in the six months ended March 31, 2022 to $0.83 per unit in the six months ended March 31, 2023, due to increased price of traditional Chinese medicine raw materials, and (iii) the depreciation of RMB against US$ had a 9.5% negative impact on our gross profit from sales of TCMD products.
Gross profit from third-party product sales increased slightly by $15,525, or 0.5%, from $3,355,749 in the six months ended March 31, 2022 to $3,371,274 in the six months ended March 31, 2023, while the gross margin of third-party product sales slightly decreased by 0.8%, from 37.9% in the six months ended March 31, 2022 to 37.1% in the six months ended March 31, 2023. The increase in our gross profit from third-party products was affected by the increase in sales volume and average unit selling price, and partially offset by the decrease in average unit cost and 9.5% negative impact from foreign currency fluctuation. The average unit selling price of third-party products decreased by 14.5%, or $0.27 per unit, while the average unit cost of third-party products also decreased by 13.0%, or $0.15 per unit.
7
Operating expenses
The following table sets forth the breakdown of our operating expenses for the six months ended March 31, 2023 and 2022:
| For the six months ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | Variance | ||||||||||||||||||||||
| Amount | % of revenue | Amount | % of revenue | Amount | % | |||||||||||||||||||
| Total revenue | $ | 18,467,186 | 100.0 | % | $ | 24,202,340 | 100.0 | % | $ | (5,735,154 | ) | (23.7 | )% | |||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | 2,330,508 | 12.6 | % | 9,079,771 | 37.5 | % | (6,749,263 | ) | (74.3 | )% | ||||||||||||||
| General and administrative expenses | 1,380,053 | 7.5 | % | 1,830,923 | 7.6 | % | (450,870 | ) | (24.6 | )% | ||||||||||||||
| Research and development expenses | 2,268,335 | 12.3 | % | 144,461 | 0.6 | % | 2,123,874 | 1,470.2 | % | |||||||||||||||
| Total operating expenses | $ | 5,978,896 | 32.4 | % | $ | 11,055,155 | 45.7 | % | $ | (5,076,259 | ) | (45.9 | )% | |||||||||||
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, | ||||||||||||||||||||||||
| 2023 | 2022 | Variance | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Salary and employee benefit expenses | $ | 349,755 | 15.0 | % | $ | 447,162 | 5.0 | % | $ | (97,407 | ) | (21.8 | )% | |||||||||||
| Advertising expenses | 1,340,368 | 57.5 | % | 8,219,488 | 90.5 | % | (6,879,120 | ) | (83.7 | )% | ||||||||||||||
| Shipping and delivery expenses | 559,882 | 24.0 | % | 347,908 | 3.8 | % | 211,974 | 60.9 | % | |||||||||||||||
| Business travel and meals expenses | 71,535 | 3.1 | % | 57,488 | 0.6 | % | 14,047 | 24.4 | % | |||||||||||||||
| Other sales promotion related expenses | 8,968 | 0.4 | % | 7,725 | 0.1 | % | 1,243 | 16.1 | % | |||||||||||||||
| Total selling expenses | $ | 2,330,508 | 100.0 | % | $ | 9,079,771 | 100.0 | % | $ | (6,749,263 | ) | (74.3 | )% | |||||||||||
8
Our selling expenses decreased by $6,749,263, or 74.3%, to $2,330,508 for the six months ended March 31, 2023, from $9,079,771 for the six months ended March 31, 2022, primarily attributable to (i) a decrease in advertising expenses by $6,879,120, or 83.7%, from $8,219,488 in the six months ended March 31, 2022, to $1,340,368 in the six months ended March 31, 2023. In September 2021, we entered into an advertising service agreement with a third party, Guangdong Fengyang Legend Consulting Co., Ltd. (“Fengyang Legend”) to promote the sales of our major TCMD products, Bai Nian Dan and Guben Yanling Pill with a service period of one year, from October 1, 2021 to September 30, 2022. In March 2022, we entered into an advertising service agreement with a third-party, Health Headline to promote our brand on the Health Headline’s website and mobile app, with a service period of ten months from March 1, 2022 to December 31, 2022. As these agreements expired in September and December 2022, respectively, advertising expenses decreased significantly in the six months ended March 31, 2023; and (ii) partially offset by an increase in shipping and delivery expenses by $211,974, or 60.9%, from $347,908 in the six months ended March 31, 2022 to $559,882 in the six months ended March 31, 2023, due to an increase in our sales volume and increased freight cost caused by the COVID-19 pandemic and rising fuel prices during the six months ended March 31, 2023.
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, | ||||||||||||||||||||||||
| 2023 | 2022 | Variance | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Salary and employee benefit expense | $ | 305,163 | 22.1 | % | $ | 345,344 | 18.9 | % | $ | (40,181 | ) | (11.6 | )% | |||||||||||
| Depreciation and amortization | 91,279 | 6.6 | % | 113,962 | 6.2 | % | (22,683 | ) | (19.9 | )% | ||||||||||||||
| Bad debt reserve expenses (recovery) | 0 | 0.0 | % | 484,811 | 26.5 | )% | (484,811 | ) | (100.0 | )% | ||||||||||||||
| Land and property tax | 48,739 | 3.5 | % | 53,348 | 2.9 | % | (4,609 | ) | (8.6 | )% | ||||||||||||||
| Office supply and utility expense | 338,735 | 24.5 | % | 255,627 | 14.0 | % | 83,108 | 32.5 | % | |||||||||||||||
| Transportation, business travel and meals expense | 51,530 | 3.7 | % | 50,217 | 2.7 | % | 1,313 | 2.6 | % | |||||||||||||||
| Consulting fee | 503,046 | 36.5 | % | 474,026 | 25.9 | % | 29,020 | ) | 6.1 | % | ||||||||||||||
| Inspection and maintenance fee | 21,701 | 1.6 | % | 29,695 | 1.6 | % | (7,994 | ) | (26.9 | )% | ||||||||||||||
| Stamp tax and other expenses | 19,860 | 1.5 | % | 23,893 | 1.3 | % | (4,033 | ) | (16.9 | )% | ||||||||||||||
| Total general and administrative expenses | $ | 1,380,053 | 100.0 | % | $ | 1,830,923 | 100.0 | % | $ | (450,870 | ) | (24.6 | )% | |||||||||||
9
General and administrative expenses decreased by $450,870, or 24.6%, to $1,380,053 for the six months ended March 31, 2023 from $1,830,923 for the six months ended March 31, 2022, primarily attributable to (i) a decrease in bad debt expense by $484,811, because we accrued less bad debt expenses based on our assessment of the collectability of the accounts receivable and advance to suppliers; (ii) a decrease in our salaries, welfare expenses and insurance expenses paid to administration employees by $40,181, or 11.6%, because of lower amount of annual bonus and welfare expenses in the six months ended March 31, 2023 as compared to the six months ended March 31, 2022, and (iii) partially offset by an increase in office supply and utility expense by $83,108, or 32.5% due to the registration fees paid to U.S. Securities and Exchange Commission and annual listings fees paid to Nasdaq Stock Market for the six months ended March 31, 2023.
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, | ||||||||||||||||||||||||
| 2023 | 2022 | Variance | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Salary and employee benefit expenses to research and development staff | $ | 74,073 | 3.3 | % | $ | 82,198 | 56.9 | % | $ | (8,125 | ) | (9.9 | )% | |||||||||||
| Materials used in research and development activities | 666,765 | 29.4 | % | 52,262 | 36.2 | % | 614,503 | 1175.8 | % | |||||||||||||||
| Expenditure on new product development | 1,505,144 | 66.4 | - | - | 1,505,144 | - | ||||||||||||||||||
| Depreciation and others | 22,353 | 0.9 | % | 10,001 | 6.9 | % | 12,352 | 123.5 | % | |||||||||||||||
| Total research and development expenses | $ | 2,268,335 | 100.0 | % | $ | 144,461 | 100.0 | % | $ | 2,123,874 | 1470.2 | % | ||||||||||||
Research and development expenses increased by $2,123,874, or 1,470.2%, to $2,268,335 for the six months ended March 31, 2023, from $144,461 for the six months ended March 31, 2022, primarily attributable to (i) an increase in research and development expense of $1,505,144 to develop and test eight new Chinese medicine products in order to diversify our future product portfolio. We entered into several cooperative agreements with external academic and research institutions to jointly conduct the new product development with activities beginning in August 2022. Accordingly, we incurred significant amount of research and development expense in connection with such efforts during the six months ended March 31, 2023; and (ii) an increase in the materials used in the research and development activities by $614,503. In order to develop new products and improve the formulation of several existing products, we conducted more testing on product stability and safety, and as a result, more materials were used in R&D activities for the six months ended March 31, 2023 than the six months ended March 31, 2022.
10
Other income (expenses), net
Total other expenses, net, decreased by $498,990, or 82.0%, to $109,685 for the six months ended March 31, 2023 from $608,675 for the six months ended March 31, 2022 primarily attributable to a decrease of $529,499 in short-term investment income from wealth management financial products.
Provision for Income Taxes
Provision for income taxes was $974,358 for the six months ended March 31, 2023, representing a decrease of $603,861, or 38.3%, from $1,578,219 for the six months ended March 31, 2022 due to decreased taxable income.
Net Income
Net loss was $715,427 for the six months ended March 31, 2023, representing a $2,447,162 decrease from a net income of $1,731,735 for the six months ended March 31, 2022.
Liquidity and Capital Resources
As of March 31, 2023, we had $12.9 million in cash on hand. We also had short-term investments of $13.3 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, 2023, we also had $17.5 million in accounts receivable. Our accounts receivable primarily include balance due from customers for our pharmaceutical products sold and delivered to customers. Approximately 77.6%, or $14.2 million, of our net accounts receivable balance as of March 31, 2023 has been subsequently collected. Collected accounts receivable will be used as working capital in our operations, if necessary.
As of March 31, 2023, our inventory balance amounted to $2.8 million, primarily consisting of raw materials, 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.
On June 25, 2021, we signed a construction sub-contract with sub-contractor Jiangxi Chenyuan Construction Project Co., Ltd. (“Chenyuan”), pursuant to which, Chenyuan will help us construct four manufacturing plant buildings and an office building with a total estimated budget of RMB165 million (approximately $24.0 million). As of March 31, 2023, we had made a prepayment of approximately RMB69.2 million (approximately $10.1 million) to Chenyuan and future additional capital expenditure on this constriction-in-process (“CIP”) project was estimated to be approximately RMB95.8 million (equivalent to $13.9 million), among which approximately $3.6 million is required for the next 12 months. 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.
11
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 $4.6 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 March 31, 2023, we had made a prepayment of RMB16 million (approximately $2.3 million) to Jiangxi Yueshang. The remaining balance is expected to be paid by August 2024.
As of March 31, 2023, we also had short-term bank loans of approximately $4.1 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, 2023, our working capital balance was $29.3 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 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, 2023 are released.
The following table sets forth summary of our cash flows for the periods indicated:
| For the Six Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash provided by operating activities | $ | 4,798,702 | $ | 6,118,203 | ||||
| Net cash used in investing activities | (646 | ) | (55,091 | ) | ||||
| Net cash provided by (used in) financing activities | 2,080,918 | (19,991 | ) | |||||
| Effect of exchange rate change on cash and restricted cash | 364,084 | 115,271 | ||||||
| Net increase in cash | 7,243,058 | 6,158,392 | ||||||
| Cash, beginning of period | 5,711,458 | 8,077,908 | ||||||
| Cash, end of period | $ | 12,954,516 | $ | 14,236,300 | ||||
Operating Activities
Net cash provided by operating activities was $4,798,702 for the six months ended March 31, 2023, primarily consisted of the following:
| ● | Net loss of $715,427 for the period. |
| ● | An increase in accounts payable of $7,928,308 due to pending invoices from suppliers for raw materials purchased in the first quarter of 2023. |
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| ● | An increase in accounts receivable of $1,763,903. Our accounts receivable primarily includes balance due from customers for our pharmaceutical products sold and delivered to customers. As of date of this report, approximately 77.6%, or $14.2 million of our net accounts receivable balance as of March 31, 2023 has been subsequently collected. Collected accounts receivable will be used as working capital in our operations, if necessary. |
| ● | A decrease in deferred income tax benefit of $556,867 as we utilized deferred tax asset in the six months ended March 31, 2023. |
| ● | An increase in inventory balance of $488,746 because we increased inventory stockpiles to reduce the negative impact from increased market price of Chinese traditional medicine raw materials. |
| ● | A decrease in accrued expenses and other current liabilities of $465,431 due to payments made to our advertising service provider in the six months ended March 31, 2023. |
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. |
| ● | An increase 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 date of this report, all 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. |
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Investing Activities
Net cash used in investing activities amounted to $646 for the six months ended March 31, 2023 due to purchase of fixed assets.
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.
Financing Activities
Net cash provided by financing activities amounted to $2,080,918 for the six months ended March 31, 2023, primarily include the following:
| ● | Proceeds from short-term bank loans of $1,146,776 and repayment of bank loans of $1,146,776. |
| ● | Proceeds from related party borrowings of $2,080,918. 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 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. |
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, 2023 and 2022, 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.
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As of March 31, 2023, we had the following contractual obligations:
| Payments Due by Period | ||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-2 years | 2-3 years | ||||||||||||
| (1) Debt Obligations | $ | 4,077,108 | $ | 4,077,108 | $ | $ | - | |||||||||
| (2) Capital expenditure commitment on CIP project | 13,949,534 | 3,603,872 | 9,144,371 | 1,201,291 | ||||||||||||
| (3) Capital expenditure commitment for purchase of property | 2,329,776 | - | 2,329,776 | - | ||||||||||||
| Total | $ | 20,356,418 | $ | 7,680,980 | $ | 11,474,147 | $ | 1,201,291 | ||||||||
| (1) | As of March 31, 2023, we had total $4,077,108 short-term borrowings from LRC Bank and Bank of Communications (see Footnote 12 of our unaudited consolidated financial statements and footnotes, Short-term bank loans, for details). |
| (2) | On June 25, 2021, we signed a construction sub-contract with Chenyuan, pursuant to which, Chenyuan will help us construct four manufacturing plant buildings and an office building with a total estimated budget of RMB165 million (approximately $24.0 million). As of March 31, 2023, we had made a prepayment of approximately RMB69.2 million (approximately $10.1 million) to Chenyuan and future additional capital expenditure on this CIP project was estimated to be approximately RMB95.8 million (equivalent to $13.9 million) (see Footnote 10 of our unaudited consolidated financial statements and footnotes, Prepayment for CIP project, for details). |
| (3) | On May 6, 2021, we entered into a real estate property purchase agreement with a related party, 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 $4.6 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 March 31, 2023, we had made a prepayment of RMB16 million (approximately $2.3 million) to Jiangxi Yueshang. The remaining balance is expected to be paid by August 2024 (see Footnote 11 of our unaudited consolidated financial statements and footnotes, Prepayment for purchase of a property, for details). |
Trend Information
Other than as disclosed elsewhere in this report, 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, 2023 and September 30, 2022.
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.
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