Financial Performance - Total revenue for the six months ended March 31, 2023, was $18,467,186, a decrease of 23.5% compared to $24,202,340 for the same period in 2022[4] - Gross profit for the six months ended March 31, 2023, was $6,128,142, down from $13,756,434 in the prior year, reflecting a gross margin decline[4] - The net loss for the six months ended March 31, 2023, was $715,427, contrasting with a net income of $1,731,735 for the same period in 2022[4] - Earnings per share for the six months ended March 31, 2023, was $(0.20), down from $0.48 in the same period of 2022[4] - Net income for the quarter ended March 31, 2023, was a loss of $715,427 compared to a net income of $1,731,735 for the same period in 2022[12] - Net income for the six months ended March 31, 2023, was $(715,427), compared to $1,731,735 for the same period in 2022[141] Expenses and Costs - Operating expenses totaled $5,978,896 for the six months ended March 31, 2023, compared to $11,055,155 in the same period of 2022, indicating a reduction in costs[4] - Total research and development expenses for the six months ended March 31, 2023, were approximately $2,268,335, a significant increase from $144,461 in the same period of 2022[53] - Advertising expenses for the six months ended March 31, 2023, amounted to $1,340,368, compared to $8,219,488 for the same period in 2022, reflecting a decrease in marketing expenditure[55] - The company recorded total interest expense of $90,044 for the six months ended March 31, 2023, compared to $103,765 for the same period in 2022[99] Assets and Liabilities - Total current assets increased to $52,515,213 as of March 31, 2023, from $41,505,680 as of September 30, 2022, representing a growth of 26.5%[2] - Total liabilities increased to $23,241,660 as of March 31, 2023, compared to $13,097,552 as of September 30, 2022, reflecting a rise of 77.5%[2] - Shareholders' equity rose to $47,126,671 as of March 31, 2023, up from $46,442,323 as of September 30, 2022, indicating a slight increase of 1.5%[2] - Cash and short-term investments totaled $26,269,418 as of March 31, 2023, compared to $18,860,052 as of September 30, 2022, reflecting an increase of 39.0%[2] - The company recorded an allowance for uncollectible accounts of $820,177 as of March 31, 2023, up from $791,827 in the previous period[28] - The allowance for doubtful accounts increased to $820,177 as of March 31, 2023, from $791,827 as of September 30, 2022, reflecting a rise of approximately 3.6%[75] Cash Flow - Net cash provided by operating activities was $4,798,702, a decrease from $6,118,203 in the prior year[12] - Net cash used in operating activities was $(116,938) compared to $(358,026) in the previous year[143] - Cash repayment from subsidiaries provided $105,058 in financing activities, down from $299,592 in the prior year[143] - Cash at the end of the period was $12,954,516, down from $14,236,300 at the end of the previous year[12] - Cash at the end of the period decreased to $17,157 from $51,585 a year earlier[143] Revenue Recognition and Sales - The Company recognizes revenue when goods are transferred to customers, with no right of return, ensuring revenue is reported net of all value-added taxes[49] - There were no contract assets or liabilities reported as of March 31, 2023, indicating a straightforward revenue recognition process[50] - Sales of the Guben Yanling Pill represented 30.4% of total revenue for the six months ended March 31, 2023, down from 43.6% in the same period of 2022[109] - Sales of TCMD products manufactured by the Company decreased to $9,374,312, down 38.8% from $15,354,635 in the prior year[126] - Sales of third-party products increased to $9,092,874, up 2.8% from $8,847,705 in the previous year[126] Investments and Acquisitions - The company established a new subsidiary, Guangzhou Universe Hanhe Medical Research Co., Ltd., for R&D of new pharmaceutical products[19] - The prepayment for acquisition of Yunnan Faxi Pharmaceuticals Co., Ltd. is recorded at approximately $3.6 million, with the total acquisition price set at RMB72 million (approximately $10.5 million)[79] - The company has made a prepayment of approximately RMB69.2 million (approximately $10.1 million) for the construction of manufacturing facilities, with completion expected by December 2024[88] - The Company’s investment in Jiangxi Jian Rural Commercial Bank was valued at $728,055 as of March 31, 2023, compared to $702,890 as of September 30, 2022[46] Shareholder Information - A share consolidation of 6 ordinary shares into 1 was completed on July 27, 2023, affecting the company's share capital[20] - The company completed a share consolidation on July 27, 2023, converting six ordinary shares into one ordinary share, resulting in 3,625,000 shares issued and outstanding as of March 31, 2023[113] - The company has not declared or paid dividends during the six months ended March 31, 2023, and may not choose to make additional distributions in the future[116][117] Market and Customer Concentration - One customer accounted for 14.1% of total revenue for the six months ended March 31, 2023, compared to no single customer exceeding 10% in the same period of 2022[108] - As of March 31, 2023, three suppliers accounted for 59.4%, 22.5%, and 12.5% of total advance to supplier balance, indicating a significant concentration risk[109] Foreign Currency and Translation - The company reported a foreign currency translation adjustment of $1,399,775 for the six months ended March 31, 2023, compared to $492,194 in the prior year[4] - The effect of changes in foreign exchange rates on cash was $120, contrasting with $(374) in the previous year[143]

PART I [Item 3. Key Information](index=7&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section outlines significant investment risks, including business and industry challenges, operational risks in China, and risks related to the company's ordinary shares [Risk Factors](index=7&type=section&id=D.%20Risk%20Factors) The company faces substantial risks across its business, China operations, and publicly traded shares, including supply chain reliance, regulatory uncertainties, and potential delisting - Key business risks include **price increases in raw materials**, reliance on a **complex supply chain**, and operating in a **highly competitive industry**[13](index=13&type=chunk)[19](index=19&type=chunk)[25](index=25&type=chunk) - The company faces significant risks related to doing business in China, including potential **government intervention**, uncertainties in the **legal system**, and the possibility of **delisting under the Holding Foreign Companies Accountable Act (HFCA Act)** if the PCAOB cannot inspect its auditors[15](index=15&type=chunk)[72](index=72&type=chunk)[76](index=76&type=chunk) - The company's auditor is headquartered in California and has not been inspected by the PCAOB, but is expected to be inspected on a regular basis, and is not subject to the PCAOB's December 2021 determination regarding firms in China and Hong Kong[78](index=78&type=chunk)[82](index=82&type=chunk) - Risks related to the company's ordinary shares include **significant price volatility** and a potential delisting from Nasdaq, though it regained compliance with the minimum bid price requirement in November 2022 after a July 2022 notification[18](index=18&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk) - The company is a **'controlled company'** as its CEO, Mr. Gang Lai, holds more than **50% of the voting power**, allowing reliance on exemptions from certain corporate governance requirements[178](index=178&type=chunk) - A **material weakness in internal control over financial reporting** was identified as of September 30, 2022, related to a lack of accounting staff with appropriate knowledge of U.S. GAAP and SEC reporting requirements[191](index=191&type=chunk) [Item 4. Information on the Company](index=49&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section details the company's history, corporate structure, and business operations, focusing on its PRC subsidiaries' manufacturing and distribution of Traditional Chinese Medicine Derivatives [History and Development of the Company](index=49&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) Universe Pharmaceuticals INC is a Cayman Islands holding company operating solely through PRC subsidiaries, facing significant legal and operational risks in China, with limited cash transfers to the holding company and dividend restrictions - The company is a Cayman Islands holding company with no operations of its own; all business is conducted by its PRC subsidiaries, and it does not utilize a VIE structure[208](index=208&type=chunk) - For the year ended September 30, 2022, the Cayman holding company received a cash transfer of **$303,746** from its Hong Kong subsidiary for director compensation and professional fees, with no dividends or distributions from PRC subsidiaries[214](index=214&type=chunk) - The company's ability to pay dividends is restricted by PRC regulations, which require PRC subsidiaries to set aside at least **10% of after-tax profits** into a statutory reserve until it reaches **50% of registered capital**, and these reserves are not distributable as cash dividends[216](index=216&type=chunk)[115](index=115&type=chunk) [Business Overview](index=55&type=section&id=B.%20Business%20Overview) The company manufactures and distributes 13 Traditional Chinese Medicine Derivative (TCMD) products, with Guben Yanling Pill as its signature product, and also distributes approximately 2,785 third-party medical products across China - The company manufactures **13 types of TCMD products**, categorized as chronic condition treatments and cold/flu medications, and also distributes around **2,785 third-party products**, including biomedical drugs and medical instruments[231](index=231&type=chunk)[233](index=233&type=chunk) Revenue Contribution by Product Type (FY2020-2022) | Product Category | FY2022 Revenue Share | FY2021 Revenue Share | FY2020 Revenue Share | | :--- | :--- | :--- | :--- | | Guben Yanling Pill | 42.5% | 40.3% | 38.2% | | Other Manufactured Products | 17.3% | 21.3% | 21.6% | | Third-Party Products | 40.2% | 38.4% | 40.2% | - The company's customer base decreased slightly from **2,708** as of Sep 30, 2021, to **2,651** as of Sep 30, 2022, due to delivery issues caused by COVID-19 resurgence[234](index=234&type=chunk)[265](index=265&type=chunk) - Key growth strategies include building a strong national brand image for 'Bai Nian Dan (百年丹)', enhancing the distribution network, integrating manufacturing capabilities, and growing R&D capacity for products targeting the elderly[242](index=242&type=chunk)[243](index=243&type=chunk)[244](index=244&type=chunk)[245](index=245&type=chunk) - As of September 30, 2022, the company had **224 employees**, with the largest departments being Manufacturing (**38%**) and Marketing (**25%**)[280](index=280&type=chunk)[281](index=281&type=chunk) [Item 5. Operating and Financial Review and Prospects](index=78&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section analyzes the company's financial performance, noting a significant revenue decrease and net loss in FY2022 due to increased selling expenses, contrasting with strong growth in FY2021, while assessing liquidity for future capital commitments [Operating Results](index=78&type=section&id=A.%20Operating%20Results) The company experienced a significant downturn in FY2022, with revenue falling 16.3% and a net loss of $8.7 million due to a massive increase in advertising expenses, contrasting sharply with FY2021's 56.3% revenue growth and $11.3 million net income Consolidated Results of Operations (FY2022 vs FY2021) | Metric | FY 2022 | FY 2021 | Change (%) | | :--- | :--- | :--- | :--- | | **Revenue** | $40,143,151 | $47,982,031 | (16.3)% | | **Gross Profit** | $21,891,336 | $25,326,177 | (13.6)% | | Gross Margin | 54.5% | 52.8% | +1.7 p.p. | | **Operating Expenses** | $29,330,134 | $11,736,037 | 149.9% | | **Net (Loss) Income** | $(8,736,566) | $11,319,952 | (177.2)% | - The decrease in FY2022 revenue was driven by a **37.2% drop in sales volume** of self-manufactured TCMD products due to COVID-19 disruptions, partially offset by a **29.1% increase in their average selling price**[365](index=365&type=chunk)[380](index=380&type=chunk)[382](index=382&type=chunk) - Selling expenses surged by **541.8% in FY2022 to $19.1 million**, primarily due to a **$16.2 million increase in advertising expenses** related to new TV and media campaigns[400](index=400&type=chunk) - Research and development expenses increased by **39.9% in FY2022 to $7.6 million**, mainly for the development and testing of eight new Chinese medicine products[404](index=404&type=chunk) Consolidated Results of Operations (FY2021 vs FY2020) | Metric | FY 2021 | FY 2020 | Change (%) | | :--- | :--- | :--- | :--- | | **Revenue** | $47,982,031 | $30,703,960 | 56.3% | | **Gross Profit** | $25,326,177 | $14,093,820 | 79.7% | | Gross Margin | 52.8% | 45.9% | +6.9 p.p. | | **Operating Expenses** | $11,736,037 | $3,842,095 | 205.5% | | **Net Income** | $11,319,952 | $7,558,222 | 49.8% | - The **56.3% revenue growth in FY2021** was driven by a **22.6% increase in customers**, higher sales volume of TCMD products, and significant price increases for both self-manufactured (**46.3%**) and third-party (**79.6%**) products[412](index=412&type=chunk)[366](index=366&type=chunk) [Liquidity and Capital Resources](index=102&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) As of September 30, 2022, the company had $28.4 million in working capital, deemed sufficient for short-term needs, despite significant future capital commitments for construction and a potential acquisition, with net cash used in operating activities improving to $1.3 million Cash Flow Summary (FY2020-2022) | Cash Flow Activity | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | **Operating Activities** | $(1,312,346) | $(2,055,847) | $6,115,157 | | **Investing Activities** | $(3,908,105) | $(27,059,958) | $(51,798) | | **Financing Activities** | $3,317,943 | $26,581,809 | $470,136 | | **Net Change in Cash** | $(2,366,450) | $(1,980,294) | $6,880,881 | - As of September 30, 2022, the company had **$5.7 million in cash** and **$13.1 million in liquid short-term investments**, with a total working capital of **$28.4 million**[445](index=445&type=chunk)[451](index=451&type=chunk) - The company has significant capital commitments, including an estimated **$13.5 million remaining for a construction-in-progress (CIP) project** expected to be completed in December 2024, and a **$10.1 million letter of intent for a 51% equity acquisition** of Yunnan Faxi[447](index=447&type=chunk)[450](index=450&type=chunk)[472](index=472&type=chunk) - Net cash used in operating activities in FY2022 was **$1.3 million**, primarily due to a net loss of **$8.7 million**, offset by non-cash charges and a **$7.4 million decrease in prepaid advertising**[454](index=454&type=chunk)[455](index=455&type=chunk) - Net cash used in investing activities in FY2021 was **$27.1 million**, largely due to the purchase of **$15.3 million in short-term investments** and **$10.6 million in prepayments for the CIP project**[462](index=462&type=chunk) - Net cash from financing activities in FY2021 was **$26.6 million**, primarily from the **$25.6 million net proceeds of its IPO**[463](index=463&type=chunk)[464](index=464&type=chunk) [Item 6. Directors, Senior Management and Employees](index=112&type=section&id=ITEM%206.%20DIRECTORS,%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section provides information on the company's leadership and governance, including its five-member board with three independent directors, CEO Gang Lai's controlling shareholder status, and aggregate executive compensation - The board of directors consists of five members: Gang Lai (Chairman & CEO), Lin Yang (CFO & Director), and three independent directors (Jiawen Pang, H. David Sherman, Ding Zheng)[501](index=501&type=chunk)[502](index=502&type=chunk)[503](index=503&type=chunk) - The company is a **'controlled company'** under Nasdaq rules because CEO Gang Lai beneficially owns approximately **57.38% of the aggregate voting power**[512](index=512&type=chunk)[534](index=534&type=chunk) - Aggregate compensation paid to executive officers and directors for the fiscal year ended September 30, 2022, was **$121,000**[514](index=514&type=chunk) - The company has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee, each composed of the three independent directors[517](index=517&type=chunk)[518](index=518&type=chunk)[519](index=519&type=chunk) [Item 7. Major Shareholders and Related Party Transactions](index=118&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section details CEO Gang Lai's controlling shareholder status and significant related party transactions, including working capital advances, loan guarantees, and a property purchase prepayment from an entity previously linked to the CEO - Mr. Gang Lai is the controlling shareholder, beneficially owning **12,480,000 ordinary shares**, which represents **57.38% of the voting power**[534](index=534&type=chunk)[535](index=535&type=chunk) - As of September 30, 2022, the company had a balance of **$3,379,263 due to related parties**, primarily consisting of non-interest-bearing working capital advances from CEO Mr. Gang Lai[539](index=539&type=chunk) - In May 2021, the company entered an agreement to purchase property from Jiangxi Yueshang, an entity in which CEO Mr. Gang Lai owned a **5% interest**, making a prepayment of **RMB 16 million (approx. $2.25 million)**, with Mr. Lai divesting his interest in January 2022[540](index=540&type=chunk)[541](index=541&type=chunk) - The company's controlling shareholder, Mr. Gang Lai, and other related parties have provided personal and corporate guarantees for the company's bank loans[542](index=542&type=chunk) [Item 8. Financial Information](index=119&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section confirms no material legal proceedings and outlines the company's dividend policy, which currently involves no payouts due to a focus on business expansion and significant PRC regulatory restrictions on profit repatriation - The company has not declared or paid any dividends since its IPO and does not plan to in the foreseeable future, intending to retain earnings for business expansion[546](index=546&type=chunk) - The ability to pay dividends is heavily restricted by PRC regulations, which only permit dividends to be paid out of accumulated profits determined under Chinese accounting standards and require setting aside funds for a statutory reserve[549](index=549&type=chunk) - The PRC government imposes controls on the conversion of RMB into foreign currencies and remittance out of China, which could hinder the company's ability to pay dividends to foreign shareholders[550](index=550&type=chunk) [Item 10. Additional Information](index=122&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) This section details the company's share capital structure, memorandum and articles of association, and a comprehensive overview of tax implications in the PRC, Hong Kong, and the United States, including potential PFIC status for U.S. investors - The company's authorized share capital is **$312,500**, divided into **90,000,000 ordinary shares** and **10,000,000 preferred shares**, with a par value of **$0.003125 per share**[562](index=562&type=chunk) - Under PRC's Enterprise Income Tax (EIT) Law, the company's PRC subsidiaries are generally subject to a **25% tax rate**, but key subsidiaries Jiangxi Universe and Universe Trade qualify as High and New Technology Enterprises (HNTEs) and enjoy a reduced rate of **15%**[845](index=845&type=chunk)[343](index=343&type=chunk) - Dividends paid from PRC subsidiaries to the Hong Kong holding company are subject to a **10% withholding tax**, which may be reduced to **5%** under the China-Hong Kong tax treaty if certain conditions are met[624](index=624&type=chunk) - The company believes it is not currently a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, but its status is determined annually and could change depending on the composition of its income and assets, as well as its market capitalization[643](index=643&type=chunk)[185](index=185&type=chunk) [Item 11. Quantitative and Qualitative Disclosures About Market Risk](index=140&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company is exposed to foreign exchange risk due to RMB-denominated revenues and USD-quoted shares, with a hypothetical 10% USD depreciation impacting cash by RMB 4.05 million, alongside credit and interest rate risks - The company's primary market risk is **foreign exchange risk**, as revenues are denominated in RMB while financial statements are reported in USD, and the RMB is not freely convertible[661](index=661&type=chunk) - As of September 30, 2022, the company held **US$5.7 million in USD-denominated cash**; a hypothetical **10% depreciation of the USD against the RMB** would result in a decrease of **RMB 4.05 million in cash**[663](index=663&type=chunk) - The company is exposed to **credit risk** from its unsecured accounts receivable, which it mitigates through creditworthiness assessments and monitoring[664](index=664&type=chunk) PART II [Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds](index=142&type=section&id=ITEM%2014.%20MATERIAL%20MODIFICATIONS%20TO%20THE%20RIGHTS%20OF%20SECURITY%20HOLDERS%20AND%20USE%20OF%20PROCEEDS) This section details the use of the company's March 2021 IPO net proceeds of $25.6 million, with approximately $9.5 million allocated to R&D, manufacturing upgrades, and brand marketing as of September 30, 2022 - The company's IPO in March 2021 raised net proceeds of approximately **$25.6 million**[672](index=672&type=chunk) Use of IPO Proceeds as of September 30, 2022 | Use Category | Amount Used (Approx.) | | :--- | :--- | | Research and Development | $3.2 million | | Upgrading Manufacturing Facilities | $3.4 million | | Brand Marketing | $2.9 million | [Item 15. Controls and Procedures](index=142&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) Management concluded that as of September 30, 2022, the company's disclosure controls and procedures were ineffective due to a material weakness in internal control over financial reporting, stemming from a lack of adequately knowledgeable accounting staff - Management concluded that disclosure controls and procedures were **ineffective** as of September 30, 2022[673](index=673&type=chunk) - A **material weakness** was identified in internal control over financial reporting due to a lack of accounting staff with adequate U.S. GAAP and SEC reporting knowledge[676](index=676&type=chunk) - The company's remediation plan includes recruiting qualified accounting personnel, implementing U.S. GAAP training, and setting up an internal audit function[677](index=677&type=chunk) [Item 16. Corporate Governance and Accountant Services](index=143&type=section&id=ITEM%2016.%20Corporate%20Governance%20and%20Accountant%20Services) This section covers corporate governance, including the audit committee financial expert, code of ethics, principal accountant fees, and the December 2021 change in certifying accountant, noting the company's adherence to Cayman Islands home country practices as a foreign private issuer - Mr. H. David Sherman is designated as the **'audit committee financial expert'**[680](index=680&type=chunk) Principal Accountant Fees (YCM CPA INC.) | Fee Category | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Audit fees | $210,000 | $200,000 | | Audit-related fees | - | - | | Tax fees | - | - | | All other fees | - | - | | **Total** | **$210,000** | **$200,000** | - On December 7, 2021, the company appointed YCM CPA INC. as its independent registered public accounting firm, replacing Friedman LLP, a change not due to any disagreement on accounting principles or practices[687](index=687&type=chunk) - As a foreign private issuer, the company follows its home country (Cayman Islands) practice in lieu of certain Nasdaq corporate governance standards, such as the requirement for shareholder approval for certain equity issuances[690](index=690&type=chunk)[691](index=691&type=chunk) PART III [Item 18. Financial Statements](index=147&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section presents the audited consolidated financial statements for Universe Pharmaceuticals INC. and its subsidiaries for fiscal years 2020-2022, including balance sheets, income statements, cash flow statements, and accompanying notes, along with independent auditor reports Consolidated Balance Sheet Highlights | Metric | As of Sep 30, 2022 | As of Sep 30, 2021 | | :--- | :--- | :--- | | **Total Assets** | $59,539,875 | $70,144,781 | | Total Current Assets | $41,505,680 | $50,481,064 | | **Total Liabilities** | $13,097,552 | $11,210,428 | | Total Current Liabilities | $13,097,552 | $11,210,428 | | **Total Shareholders' Equity** | $46,442,323 | $58,934,353 | Consolidated Income Statement Highlights | Metric | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | **Revenue** | $40,143,151 | $47,982,031 | $30,703,960 | | **Gross Profit** | $21,891,336 | $25,326,177 | $14,093,820 | | **Income from Operations** | $(7,438,798) | $13,590,140 | $10,251,725 | | **Net (Loss) Income** | $(8,736,566) | $11,319,952 | $7,558,222 | | **EPS (Basic & Diluted)** | $(0.40) | $0.60 | $0.47 | Consolidated Cash Flow Highlights | Metric | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | **Net Cash from Operations** | $(1,312,346) | $(2,055,847) | $6,115,157 | | **Net Cash from Investing** | $(3,908,105) | $(27,059,958) | $(51,798) | | **Net Cash from Financing** | $3,317,943 | $26,581,809 | $470,136 | | **Cash at End of Year** | $5,711,458 | $8,077,908 | $10,058,202 |

[Consolidated Financial Statements](index=2&type=section&id=Consolidated%20Financial%20Statements) [Consolidated Balance Sheets](index=2&type=section&id=Consolidated%20Balance%20Sheets) Total assets slightly increased to **$71.4 million** as of March 31, 2022, driven by cash and receivables, while liabilities decreased and equity grew Consolidated Balance Sheets Summary (in USD) | Account | March 31, 2022 | September 30, 2021 | | :--- | :--- | :--- | | **Total Current Assets** | $51,660,783 | $50,481,064 | | **Total Noncurrent Assets** | $19,705,378 | $19,663,717 | | **Total Assets** | **$71,366,161** | **$70,144,781** | | **Total Current Liabilities** | $10,207,879 | $11,210,428 | | **Total Shareholders' Equity** | $61,158,282 | $58,934,353 | | **Total Liabilities and Shareholders' Equity** | **$71,366,161** | **$70,144,781** | [Consolidated Statements of Income and Comprehensive Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income%20and%20Comprehensive%20Income) Revenue remained flat at **$24.2 million**, but a surge in selling expenses from **$1.1 million to $9.1 million** drastically reduced operating and net income Statement of Income Summary (in USD) | Metric | Six Months Ended March 31, 2022 | Six Months Ended March 31, 2021 | | :--- | :--- | :--- | | **Revenue** | $24,202,340 | $24,292,948 | | **Gross Profit** | $13,756,434 | $11,988,270 | | **Total Operating Expenses** | $11,055,155 | $2,405,453 | | **Income from Operations** | $2,701,279 | $9,582,817 | | **Net Income** | $1,731,735 | $7,147,798 | | **EPS (basic and diluted)** | $0.08 | $0.44 | - Selling expenses increased dramatically by over **700%** year-over-year, from **$1.1 million to $9.1 million**, which was the primary driver for the significant drop in profitability[6](index=6&type=chunk) [Consolidated Statements of Changes in Shareholders' Equity](index=4&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Shareholders' equity grew from **$58.9 million to $61.2 million**, primarily due to **$1.7 million** net income and a **$0.5 million** currency adjustment, with prior year reflecting IPO impact - In the six months ended March 31, 2022, total equity grew by **$2.2 million**, resulting from net income of **$1.73 million** and a foreign currency translation adjustment of **$0.49 million**[13](index=13&type=chunk) - The comparative period ending March 31, 2021, shows a substantial increase in equity from **$20.8 million to $50.7 million**, primarily due to net proceeds of over **$21.9 million** from the company's IPO[9](index=9&type=chunk)[10](index=10&type=chunk)[11](index=11&type=chunk) [Consolidated Statements of Cash Flows](index=5&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow significantly increased to **$6.1 million**, despite lower net income, due to expensed advertising prepayment; cash balance rose to **$14.2 million** Statement of Cash Flows Summary (in USD) | Cash Flow Category | Six Months Ended March 31, 2022 | Six Months Ended March 31, 2021 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $6,118,203 | $1,058,129 | | **Net cash used in investing activities** | ($55,091) | ($50,875) | | **Net cash provided by (used in) financing activities** | ($19,991) | $24,136,556 | | **Net increase in cash** | $6,158,392 | $25,940,927 | | **Cash, end of period** | $14,236,300 | $35,999,129 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=6&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) [NOTE 1 — ORGANIZATION AND BUSINESS DESCRIPTION](index=6&type=section&id=NOTE%201%20%E2%80%94%20ORGANIZATION%20AND%20BUSINESS%20DESCRIPTION) Universe Pharmaceuticals Inc. is a Cayman Islands holding company focused on developing, manufacturing, and selling TCMD products for the elderly in China, completing its Nasdaq IPO in March 2021 - The company's primary business is the development, manufacturing, and sale of TCMD products for the elderly, along with the sale of third-party biochemical drugs and medical instruments throughout China[27](index=27&type=chunk) - The company completed its IPO on March 25, 2021, raising gross proceeds of **$28.75 million**. Its shares trade on the Nasdaq under the symbol 'UPC'[22](index=22&type=chunk) [NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=7&type=section&id=NOTE%202%20%E2%80%94%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section details significant US GAAP accounting policies, including consolidation, estimates, revenue recognition, foreign currency, and risks from PRC operations and COVID-19 - The company's operations are primarily in the PRC, making it subject to political, economic, and legal risks specific to China[32](index=32&type=chunk) - Revenue is recognized when goods are transferred to customers, which generally occurs upon delivery. The company acts as a principal in these transactions[63](index=63&type=chunk) - Advertising expenses surged to **$8,219,488** for the six months ended March 31, 2022, compared to **$266,884** in the prior year period[71](index=71&type=chunk) [Risks and Uncertainties](index=8&type=section&id=Risks%20and%20Uncertainties) Operations face risks from PRC environment, competition, and epidemics; COVID-19 in 2022 caused supply delays, a **~5%** price increase, and extended customer payment terms - The resurgence of COVID-19 in China in 2022 led to operational disruptions, including: - Delays in raw material purchases and product deliveries due to travel restrictions - A **~5%** increase in raw material prices from January to May 2022 compared to the prior year - Extended payment terms of **30-120 days** granted to some customers[34](index=34&type=chunk) [NOTE 3 — ACCOUNTS RECEIVABLE, NET](index=17&type=section&id=NOTE%203%20%E2%80%94%20ACCOUNTS%20RECEIVABLE%2C%20NET) Net accounts receivable increased to **$18.8 million**, with **64.9%** of the March 31, 2022 balance subsequently collected Accounts Receivable Aging and Subsequent Collection (as of March 31, 2022) | Aging Bucket | Balance | Subsequent Collection | % Collected | | :--- | :--- | :--- | :--- | | Less than 3 months | $13,615,648 | $7,841,418 | 57.6% | | 4 to 6 months | $4,967,823 | $4,102,633 | 82.6% | | 7 to 9 months | $425,163 | $244,185 | 57.4% | | Over 1 year | $270,461 | $5,453 | 2.0% | | **Total Gross A/R** | **$19,371,511** | **$12,210,373** | **63.0%** | [NOTE 4 — INVENTORY, NET](index=18&type=section&id=NOTE%204%20%E2%80%94%20INVENTORY%2C%20NET) Net inventory increased to **$3.4 million**, primarily due to a rise in raw materials and the introduction of work-in-progress inventory Inventory Composition (in USD) | Category | March 31, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Raw materials | $1,389,119 | $607,661 | | Work-in-progress | $256,282 | $0 | | Finished goods | $1,842,385 | $1,971,334 | | **Total inventory, net** | **$3,385,872** | **$2,462,542** | [NOTE 6 — PREPAYMENT FOR ADVERTISING](index=19&type=section&id=NOTE%206%20%E2%80%94%20PREPAYMENT%20FOR%20ADVERTISTING) A **$8.5 million** advertising agreement with Fengyang Legend resulted in a **$7.5 million** prepayment fully expensed in the six months ended March 31, 2022 - The company committed to a significant advertising campaign with a total contract value of approximately **$8.5 million** to promote its Bainian Pill and Guben Yanling Pill products[108](index=108&type=chunk) - A prepayment of approximately **$7.5 million** made in fiscal 2021 was fully expensed in the six months ended March 31, 2022, explaining the large increase in selling expenses for the period[108](index=108&type=chunk) [NOTE 10 — PREPAYMENT FOR CIP PROJECT](index=21&type=section&id=NOTE%2010%20%E2%80%94%20PREPAYMENT%20FOR%20CIP%20PROJECT) A **$26.0 million** CIP project for new manufacturing facilities is delayed to December 2024 due to COVID-19, with **$10.9 million** prepaid and **$15.1 million** in future commitments - The company has a significant capital project to construct four manufacturing plant buildings and an office building, with an estimated completion in December 2024[120](index=120&type=chunk) - Future minimum capital expenditures for the CIP project are estimated at **$15.1 million**, with **$3.9 million** required in the next 12 months[122](index=122&type=chunk)[123](index=123&type=chunk) [NOTE 12 — SHORT-TERM BANK LOANS](index=22&type=section&id=NOTE%2012%20%E2%80%94%20SHORT-TERM%20BANK%20LOANS) Short-term bank loans totaled **$4.41 million** at March 31, 2022, with interest rates from **4.5% to 4.81%**, and some guaranteed by related parties including the CEO Short-Term Bank Loans (in USD) | Balance | March 31, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Total short-term bank loans | $4,410,000 | $4,334,400 | - Certain loans are guaranteed by related parties, including CEO Mr. Gang Lai and his spouse[129](index=129&type=chunk) [NOTE 13 — RELATED PARTY TRANSACTIONS](index=23&type=section&id=NOTE%2013%20%E2%80%94%20RELATED%20PARTY%20TRANSACTIONS) The company engages in related party transactions, including CEO guarantees for bank loans and a **$2.52 million** prepayment to an affiliated entity for property purchase - The company made a prepayment of **$2.52 million** to Jiangxi Yueshang, an entity in which the CEO has a **5%** equity interest, for the purchase of office space[125](index=125&type=chunk)[140](index=140&type=chunk) - CEO Mr. Gang Lai and his spouse provided personal guarantees for some of the company's bank loans[137](index=137&type=chunk) [NOTE 14 — TAXES](index=24&type=section&id=NOTE%2014%20%E2%80%94%20TAXES) PRC subsidiaries benefit from a reduced **15%** tax rate due to HNTE status, though the effective tax rate for the period was **47.7%**, significantly higher than the prior year - The company's main operating subsidiaries, Jiangxi Universe and Universe Trade, are approved as HNTEs, entitling them to a reduced income tax rate of **15%**[143](index=143&type=chunk) Effective Tax Rate Reconciliation | Item | Six Months Ended March 31, 2022 | Six Months Ended March 31, 2021 | | :--- | :--- | :--- | | Statutory PRC income tax rate | 25.0% | 25.0% | | **Effective Tax Rate** | **47.7%** | **25.2%** | [NOTE 15 — CONCENTRATIONS](index=26&type=section&id=NOTE%2015%20%E2%80%94%20CONCENTRATIONS) Operations, assets, and revenue are concentrated in the PRC, with **$13.7 million** cash uninsured; Guben Yanling Pill accounted for **43.6%** of revenue - Sales of the Guben Yanling Pill product constituted **43.6%** of total revenue for the six months ended March 31, 2022, up from **34.8%** in the prior year period, indicating significant product concentration[155](index=155&type=chunk) - As of March 31, 2022, **$13.7 million** of the company's cash was held in PRC financial institutions, which are not covered by deposit insurance[155](index=155&type=chunk) [NOTE 16 — SHAREHOLDERS' EQUITY](index=27&type=section&id=NOTE%2016%20%E2%80%94%20SHAREHOLDERS'%20EQUITY) The company had **21,750,000** shares outstanding, with **$31.8 million** of subsidiary net assets restricted from transfer to the parent due to PRC regulations - The company completed its IPO in March 2021, issuing **5,750,000** ordinary shares (including over-allotment) and raising net proceeds of approximately **$25.6 million**[159](index=159&type=chunk) - PRC regulations restrict the company's subsidiaries from transferring net assets totaling **$31.8 million** to the parent company in the form of loans, advances, or cash dividends[167](index=167&type=chunk) [NOTE 18 — SEGMENT REPORTING](index=29&type=section&id=NOTE%2018%20%E2%80%94%20SEGMENT%20REPORTING) Operating as a single segment, the company saw TCMD product revenue increase to **$15.4 million**, while third-party product sales decreased to **$8.8 million** Revenue by Product Source (in USD) | Source | Six Months Ended March 31, 2022 | Six Months Ended March 31, 2021 | | :--- | :--- | :--- | | Sales of TCMD products (own) | $15,354,635 | $13,318,921 | | Sales of third-party products | $8,847,705 | $10,974,027 | | **Total revenue** | **$24,202,340** | **$24,292,948** | - Within third-party products, sales of biochemical drugs saw a sharp decline from **$9.4 million to $1.4 million**, while sales of traditional Chinese medicine pieces increased significantly from **$20,570 to $7.4 million**[176](index=176&type=chunk) [NOTE 19 — SUBSEQUENT EVENTS](index=30&type=section&id=NOTE%2019%20%E2%80%94%20SUBSEQUENT%20EVENTS) In June 2022, the subsidiary Jiangxi Universe secured two new loan agreements totaling **RMB 20 million** (approximately **$3.15 million**) for working capital - In June 2022, the company secured two new loans totaling **RMB 20 million** (approximately **$3.15 million**) for working capital purposes[179](index=179&type=chunk)[180](index=180&type=chunk) [NOTE 20 — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY](index=30&type=section&id=NOTE%2020%20%E2%80%94%20CONDENSED%20FINANCIAL%20INFORMATION%20OF%20THE%20PARENT%20COMPANY) Condensed financial statements for the parent company are provided due to restricted subsidiary net assets exceeding **25%** of consolidated net assets, with assets primarily in subsidiary investments and no liabilities [Parent Company Balance Sheets](index=31&type=section&id=Parent%20Company%20Balance%20Sheets) Parent company total assets were **$61.2 million**, mainly from **$46.8 million** in subsidiary investments and **$14.3 million** in short-term investments, with no liabilities Parent Company Balance Sheet Summary (in USD) | Account | March 31, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Cash | $51,585 | $110,393 | | Short-term investments | $14,344,092 | $13,725,204 | | Investment in subsidiaries | $46,762,605 | $45,098,756 | | **Total assets** | **$61,158,282** | **$58,934,353** | | **Total liabilities** | **$0** | **$0** | [Parent Company Statements of Income](index=32&type=section&id=Parent%20Company%20Statements%20of%20Income) Parent company net income was **$1.73 million**, primarily from **$1.39 million** in subsidiary equity earnings and **$0.70 million** from short-term investments - The parent company's income is primarily generated from equity in earnings of its subsidiaries (**$1.39 million**) and income from its own short-term investments (**$0.70 million**)[188](index=188&type=chunk) [Parent Company Statements of Cash Flows](index=32&type=section&id=Parent%20Company%20Statements%20of%20Cash%20Flows) Parent company operations used **$358k** cash, offset by a **$300k** subsidiary repayment, resulting in a **$59k** net cash decrease, contrasting with prior year's IPO inflow - The parent company's financing activities for the period consisted of a **$299,592** cash repayment received from its subsidiaries[190](index=190&type=chunk)