Universe Pharmaceuticals(UPC) - 2022 Q2 - Quarterly Report

Consolidated Financial Statements Consolidated Balance Sheets 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 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] Consolidated Statements of Changes in Shareholders' Equity 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] - 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][10][11] Consolidated Statements of Cash Flows 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 NOTE 1 — ORGANIZATION AND BUSINESS DESCRIPTION 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] - 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] NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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] - Revenue is recognized when goods are transferred to customers, which generally occurs upon delivery. The company acts as a principal in these transactions[63] - 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] Risks and Uncertainties 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] NOTE 3 — ACCOUNTS RECEIVABLE, NET 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 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 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] - 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] NOTE 10 — PREPAYMENT FOR CIP PROJECT 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] - 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][123] NOTE 12 — SHORT-TERM BANK LOANS 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] NOTE 13 — RELATED PARTY TRANSACTIONS 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][140] - CEO Mr. Gang Lai and his spouse provided personal guarantees for some of the company's bank loans[137] NOTE 14 — TAXES 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] 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 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] - 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] NOTE 16 — SHAREHOLDERS' EQUITY 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] - 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] NOTE 18 — SEGMENT REPORTING 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] NOTE 19 — SUBSEQUENT EVENTS 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][180] NOTE 20 — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY 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 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 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] Parent Company Statements of Cash Flows 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]