Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
F-1
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | ||||||||
| March 31, | September 30 | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Due from related parties | ||||||||
| Advance to suppliers | ||||||||
| Prepayment for advertising | - | |||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | ||||||||
| Prepayments made to a related party for purchase of property | ||||||||
| Prepayments for construction in progress | ||||||||
| Intangible assets, net | ||||||||
| Investment in equity securities | ||||||||
| Deferred tax assets | ||||||||
| TOTAL NONCURRENT ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term bank loans | $ | $ | ||||||
| Accounts payable | ||||||||
| Taxes payable | ||||||||
| Due to related parties | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares, $ | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserves | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUE | $ | $ | ||||||
| COST OF REVENUE AND RELATED TAX | | | ||||||
| GROSS PROFIT | | | ||||||
| OPERATING EXPENSES | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Total operating expenses | | |||||||
| INCOME FROM OPERATIONS | | | ||||||
| OTHER INCOME (EXPENSES) | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Other income (expense), net | ( | ) | ||||||
| Short-term investment income | ||||||||
| Equity investment income | - | | ||||||
| Total other income (expense), net | | ( | ) | |||||
| INCOME BEFORE INCOME TAX PROVISION | ||||||||
| PROVISION FOR INCOME TAXES | ||||||||
| NET INCOME | | | ||||||
| OTHER COMPREHENSIVE INCOME | ||||||||
| Foreign currency translation adjustment | | | ||||||
| COMPREHENSIVE INCOME | $ | $ | ||||||
| Earnings per common share - basic and diluted | $ | $ | ||||||
| Weighted average shares - basic and diluted | $ | | $ | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-3
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||
| Common Stock | Paid in | Subscription | Statutory | Retained | Comprehensive | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Reserve | Earnings | Income | Total | |||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Issuance of ordinary shares in initial public offerings, net | ||||||||||||||||||||||||||||||||
| Issuance of additional shares under over allotment option in initial public offerings, net | ( | ) | ||||||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Loss from disposal of fixed assets | ||||||||
| Changes in allowance for doubtful accounts | ( | ) | ||||||
| Changes in inventory reserve | ( | ) | ( | ) | ||||
| Deferred income tax provision (benefit) | ( | ) | ||||||
| Short-term investment income | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Advance to suppliers, net | ||||||||
| Prepayment for advertising | ||||||||
| Advances to related parties | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Taxes payable | ( | ) | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term bank loans | ||||||||
| Repayment of bank loans | ( | ) | ( | ) | ||||
| Net proceeds from initial public offerings | - | |||||||
| Proceeds from (repayment of) related party borrowings | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of changes of foreign exchange rates on cash | ||||||||
| Net increase in cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental non-cash financing activity: | ||||||||
| Subscription receivable from issuance of ordinary shares under initial public offerings | $ | $ | ||||||
| Cost of construction in progress paid in prior years | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-5
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BUSINESS DESCRIPTION
Universe Pharmaceuticals Inc. (“Universe INC” or the “Company”) was incorporated under the laws of the Cayman Islands on December 11, 2019 as an exempted company with limited liability.
Universe
INC. owns
Jiangxi
Universe Pharmaceuticals Technology Co., Ltd. (“Universe Technology”) was formed on April 8, 2019, as a Wholly Foreign-Owned
Enterprise (“WFOE”) in the People’s Republic of China (“PRC” or “China”). The registered
capital of Universe Technology is approximately $
Universe INC, Universe HK and Universe Technology are currently not engaging in any active business operations and are merely acting as holding companies.
Jiangxi
Universe Pharmaceuticals Co., Ltd.
Reorganization
A
reorganization of our legal structure (“Reorganization”) was completed on December 11, 2019. The Reorganization involved
the incorporation of Universe INC and Universe Technology, and the transfer of the
The Reorganization has been accounted for as a recapitalization among entities under common control, since the same controlling shareholders controlled all these entities before and after the Reorganization. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying unaudited condensed consolidated financial statements. Results of operations for the periods presented comprise those of the previously separate entities combined from the beginning of the period to the end of the period, eliminating the effects of intra-entity transactions.
On
March 25, 2021, the Company closed its initial public offering (the “IPO”) of
On May 12, 2021, through the Company’s PRC subsidiary, Jiangxi Universe, the Company established a wholly controlled subsidiary, Guangzhou Universe Hanhe Medical Research Co., Ltd. (“Universe Hanhe”) in Guangzhou City, China, for the business purpose of conducting research and development of new pharmaceutical products in order to diversify the Company’s product offerings in the near future. As of March 31, 2022 and as of the date of this report, Universe Hanhe has no active business operations.
F-6
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BUSINESS DESCRIPTION (continued)
Details of the subsidiaries of the Company as of March 31, 2022 are set out below:
| Name of Entity | Date
of Incorporation |
Place
of Incorporation |
%
of Ownership |
Principal Activities | ||||
| Universe INC | Parent, |
|||||||
| Universe HK | ||||||||
| Universe Technology | ||||||||
| Jiangxi Universe | ||||||||
| Universe Trade | ||||||||
| Universe Hanhe |
The Company, through its wholly-owned subsidiaries, is primarily engaged in the development, manufacturing and sale of traditional Chinese medicines derivatives (“TCMD”) products targeted to the elderly to address their physical conditions in the aging process and to promote their general well-being. In addition, the Company also sells biochemical drugs, medical instruments, traditional Chinese medicine pieces products and dietary supplements (collectively “third-party products”). All of these TCMD and third-party products are currently sold to customers including pharmaceutical companies, hospitals, clinics and drugstore chains throughout China.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The accompanying unaudited condensed consolidated financial statements include the financial statements of Universe INC, Universe HK, Universe Technology, Jiangxi Universe, Universe Trade and Universe Hanhe. All inter-company balances and transactions are eliminated upon consolidation.
Uses of estimates
In preparing the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the unaudited condensed consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for estimated uncollectible receivables, the realizability of advance to suppliers, inventory valuations, useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities, revenue recognition and realization of deferred tax assets. Actual results could differ from those estimates.
F-7
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks and Uncertainties
The main operation of the Company is located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note 1, this may not be indicative of future results.
The development and commercialization of new pharmaceutical products is highly competitive, and the industry currently is characterized by rapidly changing technologies, significant competition and a strong emphasis on intellectual property. The Company may face competition with respect to its current and future pharmaceutical product candidates from major pharmaceutical companies in China.
The Company’s business, financial condition and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, which could significantly disrupt the Company’s operations.
The
Company’s operations may be further affected by the ongoing COVID-19 pandemic. Due
to the resurgence of COVID-19 pandemic in China in 2022, there had been delays in purchase of raw material supplies and deliver products
to the customers of the PRC operating entities on a timely basis as a consequence of the travel restrictions. The prices of the raw materials
also increased by about
F-8
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash
Cash includes currency on hand and deposits held by banks that can be added or withdrawn without limitation. The Company maintains most of its bank accounts in the PRC. Cash balances in bank accounts in the PRC are not insured by the Federal Deposit Insurance Corporation or other programs.
Accounts receivable, net
Accounts
receivable are presented net of allowance for doubtful accounts. The Company determines the adequacy of reserves for doubtful accounts
based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when
there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best
estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. Actual amounts received
may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off
against the allowance for doubtful accounts after management has determined that collection is not probable. Allowance for uncollectable
balances amounted to $
Inventories, net
Inventories
are stated at net realizable value using weighted average method. Costs include the cost of raw materials, freight, direct labor and
related production overhead. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision
for diminution in the value of inventories. Net realizable value is the estimated selling price in the normal course of business less
any costs to complete and sell products. The Company evaluates inventories on a quarterly basis for its net realizable value adjustments,
and reduces the carrying value of those inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable
value based on various factors including aging, expiration dates, as applicable, taking into consideration historical and expected future
product sales. The Company recorded inventory reserve of $
Advances to suppliers, net
Advances to suppliers represent prepayments made to ensure continuous high-quality supplies and favorable purchase prices for raw materials. These advances are directly related to the purchases of raw materials used to fulfill sales orders. The Company is required from time to time to make cash advances when placing its purchase orders. These advances are settled upon suppliers delivering raw materials to the Company when the transfer of ownership occurs. The Company reviews its advances to suppliers on a periodic basis and makes general and specific allowances when there is doubt as to the ability of a supplier to provide supplies to the Company or refund an advance. As of March 31, 2022 and September 30, 2021, no allowance for doubtful accounts was deemed necessary, as the Company believes that all advances to suppliers are fully realizable.
Deferred initial public offering (“IPO”) costs
The Company complies with the requirement of the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A — “Expenses of Offering”. Deferred offering costs consist of underwriting, legal, accounting and other expenses incurred through the balance sheet date that are directly related to the intended IPO. Deferred offering costs were charged to shareholders’ equity upon the completion of the IPO on March 25, 2021.
F-9
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Short-term investments
The Company’s short-term investments consist of wealth management financial products purchased from a financial institution, which can be redeemed anytime. The financial institution invests the Company’s fund in certain financial instruments including money market funds and bonds to generate investment income. The short-term investments are deemed to be trading securities and are measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for investment are included in the unaudited condensed consolidated statements of operations and comprehensive income over the investment period (see Note 7).
Fair value of financial instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data. |
| ● | Level 3 — inputs to the valuation methodology are unobservable. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash, accounts receivable, inventories, short-term investments, advances to suppliers, prepaid expenses and other current assets, accounts payable, short-term bank loans, accrued expenses and other current liabilities, taxes payable and due to related parties, approximate the fair value of the respective assets and liabilities as of March 31, 2022 and September 30, 2021 based upon the short-term nature of the assets and liabilities. The Company’s investment in equity securities is accounted for using the measurement alternative in accordance with ASC 321, which also approximate its recorded value.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is provided using the straight-line method over their expected useful lives, as follows:
| Useful life | ||
| Buildings | ||
| Machinery and equipment | ||
| Automobiles | ||
| Office and electric equipment |
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the unaudited condensed consolidated statements of income and other comprehensive income in other income or expenses.
F-10
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, plant and equipment (continued)
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment were recorded in operating expenses for the six months ended March 31, 2022 and 2021, respectively.
Intangible Assets
Intangible assets consist primarily of land use rights and software. Under the PRC law, all land in the PRC is owned by the government and cannot be sold to an individual or company. The government grants individuals and companies the right to use parcels of land for specified periods of time. Land use rights are stated at cost less accumulated amortization. Intangible assets are amortized using the straight-line method with the following estimated useful lives:
| Useful life | ||
| Land use rights | ||
| Software |
The Company reviews the carrying value of land use rights for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment of land use rights was deemed necessary for the six months ended March 31, 2022 and 2021, respectively.
Construction-in-Progress (“CIP”)
CIP represents property and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable to the construction. CIP is not depreciated. Upon completion and ready for intended use, CIP is reclassified to the appropriate category within property, plant and equipment.
Impairment of long-lived Assets
Long-lived assets with finite lives, primarily property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated undiscounted cash flows from the use of the asset and its eventual disposition below are the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets as of March 31, 2022 and September 30, 2021.
F-11
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments in Equity Securities
The
Company accounts for its equity investments in accordance with Accounting Standards Codification (“ASC”) 321 “Investments—Equity
Securities” (“ASC 321”). In accordance with ASC 321, equity investment which the Company has no significant influence
(generally less than a
From
March 2009 to September 2017, the Company invested approximately $
The
Company initially recorded the investments at historical cost and subsequently records any dividends received from the net accumulated
earnings of the investee as income. As of March 31, 2022 and September 30, 2021, this investment amounted to $
The investments in equity securities are evaluated for impairment when facts or circumstances indicate that the fair value of the investment is less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near-term prospects of the investments; and (v) ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. There was no impairment for the Company’s investments in equity securities as of March 31, 2022 and September 30, 2021.
Revenue recognition
To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.
The Company recognizes revenue when it transfers its goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. The Company accounts for the revenue generated from sales of its TCMD and third-party products on a gross basis, as the Company is acting as a principal in these transactions, is subject to inventory risk, has latitude in establishing prices, and is responsible for fulfilling the promise to provide customers the specified goods, which the Company has control of the goods and has the ability to direct the use of goods to obtain substantially all the benefits. All of the Company’s contracts have one single performance obligation, namely, the promise is to transfer the individual goods to customers, and there is no separately identifiable other promise in the contracts. The Company’s revenue streams are recognized at a point in time when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company’s products are sold with no right of return and the Company does not provide other credits or sales incentive to customers. Revenue is reported net of all value added taxes (“VAT”).
F-12
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Contract Assets and Liabilities
Payment terms are established on the Company’s pre-established credit requirements based upon an evaluation of customers’ credit quality. Contract assets are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing when an order is placed and when shipment or delivery occurs. As of March 31, 2022 and September 30, 2021, the Company did not have contract assets and contract liabilities.
Disaggregation of Revenues
The Company disaggregates its revenue from contracts by product types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the six months ended March 31, 2022 and 2021 are disclosed in Note 17 of these unaudited condensed consolidated financial statements.
Cost of revenue
Cost of revenue consists primarily of the costs of raw materials, freight charges, direct labor, depreciation of plants and machinery, warehousing and overhead associated with the manufacturing process.
Research and development expenses
The
Company expenses all internal research and development costs as incurred, which primarily comprise employee costs, internal and external
costs related to execution of studies, including manufacturing costs, facility costs of the research center, and amortization and depreciation
to intangible assets and property, plant and equipment used in the research and development activities. For the six
months ended March 31, 2022 and 2021, total research and development expense were approximately
$
Shipping and handling costs
Shipping and handling costs are expensed as incurred. Inbound shipping and handling cost associated with bringing the purchased raw materials and third-party products from suppliers to the Company’s warehouse are included in cost of revenue. Outbound shipping and handling costs associated with shipping and delivery the products to customers are included in selling expenses.
Advertising expense
Advertising
expenses primarily relate to promotion of the Company’s brand name and products through outdoor billboards, social media such as
Weibo and WeChat, and TV advertisement. Advertising costs is expensed as incurred or deferred and then expensed the first time the advertising
takes place. Advertising expenses are included in selling expenses in the unaudited condensed consolidated statements of income and comprehensive
income. Advertising expenses amounted to $
Segment Reporting
The Company uses the management approach in determining reportable operating segments. The management approach considers the internal reporting used by the Company’s chief operating decision maker for making operating decisions about the allocation of resources of the segment and the assessment of its performance in determining the Company’s reportable operating segments. Management has determined that the Company has one operating segment (See Note 18).
F-13
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the unaudited condensed consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the six months ended March 31, 2022 and 2021. The Company does not believe there was any uncertain tax provision at March 31, 2022 and September 30, 2021.
The Company’s operating subsidiary in China is subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the six months ended March 31, 2022 and 2021. As of March 31, 2022, all of the tax returns of the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.
Value added tax (“VAT”)
Sales
revenue represents the invoiced value of goods, net of VAT. The VAT is based on gross sales price and VAT rates range up to
Earnings per Share
The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the six months ended March 31, 2022 and 2021, there were no dilutive shares.
F-14
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency translation
The functional currency for Universe INC is the U.S Dollar (“US$”). Universe HK uses Hong Kong dollar as its functional currency. However, Universe INC and Universe HK currently only serve as holding companies and did not have active operations as of the date of this report. The Company operates only in the PRC and the Company’s functional currency is the Chinese Yuan (“RMB”). The Company’s unaudited condensed consolidated financial statements have been translated into the reporting currency US$.
Assets and liabilities of the Company are translated at the exchange rate at each reporting period end date. Equity is translated at historical rates. Income and expense accounts are translated at the average rate of exchange during the reporting period. The resulting translation adjustments are reported under other comprehensive income. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
The following table outlines the currency exchange rates that were used in creating the unaudited condensed consolidated financial statements in this report:
| For
the Six Months Ended March 31, |
For the Year Ended September 30, | |||||
| 2022 | 2021 | 2021 | ||||
| Period/Year-end spot rate | ||||||
| Average rate | ||||||
Comprehensive income
Comprehensive income consists of two components, net income and other comprehensive income. The foreign currency translation gain resulting from translation of the financial statements expressed in RMB to US$ is reported in other comprehensive income in the unaudited condensed consolidated statements of income and comprehensive income.
Statement of Cash Flows
In accordance with ASC 230, “Statement of Cash Flows”, cash flows from the Company’s operations are formulated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
Employee Defined Contribution Plan
The
Company’s subsidiaries in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which
pension, work-related injury benefits, maternity insurance, medical insurance, unemployment benefit and housing fund are provided to
eligible full-time employees. The relevant labor regulations require the Company’s subsidiaries in the PRC to pay the local labor
and social welfare authorities monthly contributions based on the applicable benchmarks and rates stipulated by the local government.
The contributions to the plan are expensed as incurred. Employee social security and welfare benefits included as expenses in the accompanying
statements of income and comprehensive income amounted to $
F-15
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
Recent Adopted Accounting Pronouncements
In August 2018, the FASB Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for all entities for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures were adopted on a retrospective basis and the new disclosures were adopted on a prospective basis. The adoption of this guidance had no material impact on the Company’s unaudited condensed consolidated financial statements.
Recent Accounting Pronouncements not yet adopted
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The new guidance requires the lessee to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. In July 2018, FASB issued ASU 2018-11 Leases (Topic 842) – Targeted Improvements that reduces costs and eases implementation of the leases standard for financial statement preparers. The ASU simplifies transition requirements and, for lessors, provides a practical expedient for the separation of non-lease components from lease components. ASU 2016-02 was further amended in November 2019 by ASU 2019-10 and in June 2020 by ASU 2020-05, which deferred the effective date of new lease standard. As a result, ASC 842, Leases, is effective for public companies for annual reporting periods and interim periods within those years beginning after December 15, 2018. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. As an emerging growth company, the Company elects to apply for the new and revised accounting standards at the effective date for a private company and to adopt this guidance effective October 1, 2021. The Company is currently evaluating the impact of adopting this standard on its unaudited condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. In November 2019, the FASB issued ASU 2019-10, which extends the effective date for adoption of ASU 2016-13. In November 2019, the FASB issued ASU 2019-11 to clarify its new credit impairment guidance in ASU 326. Accordingly, for public entities that are not smaller reporting entities, ASU 2016-13 and its amendments is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an emerging growth company, the Company plans to adopt this guidance effective October 1, 2023. The Company is currently evaluating the impact of its pending adoption of ASU 2016-13 on its unaudited condensed consolidated financial statements.
F-16
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements (continued)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, which is fiscal 2021 for us, with early adoption permitted. The Company does not expect adoption of the new guidance to have a significant impact on our financial statements.
In February 2020, the FASB issued ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (topic 842) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (topic 842)”. This ASU provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. This ASU is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. The Company is evaluating the impact of this guidance on its unaudited condensed consolidated financial statements.
NOTE 3 — ACCOUNTS RECEIVABLE, NET
Accounts receivable consists of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
The Company’s accounts receivable primarily includes the balance due from customers when the Company’s pharmaceutical products are sold and delivered to customers. As of date of this report, approximately 97.5% of the Company’s accounts receivable balance at September 30, 2021 has been collected. As of date of this report, approximately 64.9%, or $12.2 million, of the Company’s net account receivable balance at March 31, 2022 has been subsequently collected and the remaining balance is expected to be substantially collected before September 30, 2022.
The following table summarizes the Company’s accounts receivable and subsequent collection by aging bucket:
Accounts Receivable by aging bucket |
Balance
as of March 31, 2022 |
Subsequent
collection |
%
of subsequent collection |
|||||||||
| Less than 3 months | $ | $ | % | |||||||||
| From 4 to 6 months | % | |||||||||||
| From 7 to 9 months | % | |||||||||||
| From 10 to 12 months | % | |||||||||||
| Over 1 year | % | |||||||||||
| Total gross accounts receivable | % | |||||||||||
| Allowance for doubtful accounts | ( |
) | - | |||||||||
| Accounts Receivable, net | $ | $ | % | |||||||||
F-17
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — ACCOUNTS RECEIVABLE, NET (continued)
Allowance for doubtful accounts movement is as follows:
| March 31, 2022 | September 30, 2021 | |||||||
| Beginning balance | $ | $ | ||||||
| Additions | ||||||||
| Bad debt recovery | ( | ) | ||||||
| Foreign currency translation adjustments | ||||||||
| Ending balance | $ | $ | ||||||
NOTE 4 — INVENTORY, NET
Inventory consists of the following:
| March 31, 2022 | September 30,
| |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Inventory valuation allowance | ( | ) | ( | ) | ||||
| Total inventory, net | $ | $ | ||||||
Impairment
of inventories is recorded in cost of goods sold. For the six months ended March 31, 2022 and 2021, recovery of previously accrued inventory
allowance amounted to $
NOTE 5 — ADVANCE TO SUPPLIERS
Advances to suppliers consist of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Advances to suppliers for inventory raw material purchase | $ | $ | ||||||
| Less: allowance for doubtful accounts | ||||||||
| Advances to suppliers | $ | $ | ||||||
Advances to suppliers represent prepayments made to suppliers to ensure continuous high-quality supplies and favorable purchase prices for raw materials. During 2021, due to supply chain disruption caused by COVID-19, the market price for raw materials continued to increase. In order to ensure sufficient raw materials for production and lock in favorable purchase prices, the Company made advance payments to suppliers.
F-18
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — PREPAYMENT FOR ADVERTISTING
On
September 6, 2021, the Company entered into an advertising service agreement with third-party, Guangdong Fengyang Legend Consulting Co.,
Ltd. (“Fengyang Legend”), pursuant to which, Fengyang Legend will assist the Company to develop and produce TV advertising
film for the Company in order to promote the Company’s sales of its major TCMD product, Bainian Pill and Guben Yanling Pill, and
coordinate the specific TV Channel to broadcast the advertising film to targeted geographic market areas. The total contracted advertising
service fee is RMB
NOTE 7 — SHORT-TERM INVESTMENTS
The Company’s short-term investments consist of wealth management financial products purchased from financial institution, which can be redeemed anytime at the Company’s discretion. The financial institution invests the Company’s fund in certain financial instruments including money market funds and bonds to generate investment income. Short-term investments consisted of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Beginning balance | $ | $ | ||||||
| Add: purchase wealth management financial products | ||||||||
| Less: redemption | ( | ) | ||||||
| Accrued investment income | ||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Ending balance of short-term investments | $ | $ | ||||||
Investment
income generated from such short-term investments amounted to $
F-19
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consists of the following:
| Useful life | March 31, 2022 | September 30, | ||||||||
| Buildings | $ | $ | ||||||||
| Machinery and equipment | ||||||||||
| Automobiles | ||||||||||
| Office and electric equipment | ||||||||||
| Construction in progress | ||||||||||
| Subtotal | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
Depreciation
expense was $
NOTE 9 — INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
| Useful life | March 31, 2022 | September 30,
| ||||||||
| Land use rights | $ | $ | ||||||||
| Software | ||||||||||
| Total | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangible assets, net | $ | $ | ||||||||
Amortization
expense was $
Estimated future amortization expense for intangible assets is as follows:
| Twelve months ending March 31, | Amortization expense | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ | ||||
F-20
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — PREPAYMENT FOR CIP PROJECT
CIP
represents direct costs of construction incurred for the Company’s manufacturing facilities. On June 25, 2021, the Company signed
a construction sub-contract with sub-contractor Jiangxi Chenyuan Construction Project Co., Ltd. (“Chenyuan”), pursuant to
which, Chenyuan will help the Company construct four manufacturing plant buildings and an office building with a total estimated budget
of RMB
As
of March 31, 2022, $
As
of March 31, 2022, future additional capital expenditure on this CIP project is estimated to be approximately RMB
As of March 31, 2022, future minimum capital expenditures on the Company’s CIP project are estimated as follows:
| Fiscal Years ending September 30, | Capital on CIP | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total | $ | |||
F-21
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — PREPAYMENT FOR PURCHASE OF A PROPERTY
On
May 6, 2021, the Company entered into a real estate property purchase agreement with related party Jiangxi Yueshang Investment Co., Ltd.
(“Jiangxi Yueshang”), an entity in which the Company’s chief executive officer, Mr. Gang Lai, owned
As
of March 31, 2022, the Company had made a prepayment of RMB
NOTE 12 — SHORT-TERM BANK LOANS
Short-term bank loans consist of the following:
| Note | March 31, 2022 | September 30, 2021 | ||||||||
| Short-term bank loans: | ||||||||||
| Maturity date on June 15, 2022, interest rate 4.81% per annum | (1) | |||||||||
| Maturity date on June 30, 2022, interest rate 4.5% per annum | (2) | |||||||||
| Maturity date on March 17, 2022, interest rate 4.81% per annum | ||||||||||
| Maturity date on March 13, 2023, interest rate 4.62% per annum | (3) | |||||||||
| Total short-term bank loans | $ | $ | ||||||||
| (1) |
| (2) |
| (3) |
For
the above-mentioned loans, the Company recorded a total interest expense of $
F-22
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — RELATED PARTY TRANSACTIONS
| (a) | Nature of relationships with related parties |
| Name | Relationship with the Company | |
| Mr. Gang Lai | ||
| Ms. Lin Yang | ||
| Greatest Group (China) Financial Management Limited (“Greatest Group”) | ||
| Foshan Shangyu Investment Holding Co., Ltd (“Foshan Shangyu”) |
| (b) | Due from related parties |
| Name | March 31, 2022 | September 30, 2021 | ||||||
| Greatest Group | $ | $ | ||||||
| Foshan Shangyu | ||||||||
| Total due from related parties | $ | $ | ||||||
The Company’s due from related parties were interest free and due on demand.
| (c) | Due to related parties |
| Name | March 31, 2022 | September 30, 2021 | ||||||
| Mr. Gang Lai | $ | $ | - | |||||
| Mrs. Lin Yang | - | |||||||
| Total due to related parties | $ | $ | ||||||
As of March 31, 2022 and September 30, 2021, due to related parties mainly consisted of advances from related parties for working capital purposes during the Company’s normal course of business. These advances are non-interest bearing and due on demand.
| (d) | Loan guarantee provided by related parties |
In connection with the Company’s bank borrowings from Bank of Communications, certain related parties of the Company, including Mr. Gang Lai, the Company’s controlling shareholder, Mr. Gang Lai’s spouse, Ms. Xing Wu, and the Company’s subsidiary, Universe Trade, jointly signed guarantee agreements with Bank of Communications to provide credit guarantee for this loan.
In connection with the Company’s bank borrowings from LRC Bank, the Company’s chief executive officer, Mr. Gang Lai, signed a guarantee agreement with LRC Bank to provide a credit guarantee for the Company’s loans from LRC Bank within the loan period (see Note 12).
F-23
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — RELATED PARTY TRANSACTIONS (continued)
| (e) | Prepayment to related party for property purchase |
NOTE 14 — TAXES
| (a) | Corporate Income Taxes (“CIT”) |
Cayman Islands
Under the current tax laws of the Cayman Islands, Universe INC is not subject to tax on its income or capital gains. In addition, no Cayman Islands withholding tax will be imposed upon the payment of dividends by the Company to its shareholders.
Hong Kong
Universe
HK is incorporated in Hong Kong and is subject to profit taxes in Hong Kong at a rate of
PRC
Under
the Enterprise Income Tax (“EIT”) Law of PRC, domestic enterprises and Foreign Investment Enterprises (“FIEs”)
are usually subject to a unified
F-24
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 — TAXES (continued)
The components of the income tax provision (benefit) are as follows:
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Current tax provision | ||||||||
| Cayman | $ | $ | ||||||
| Hong Kong | ||||||||
| PRC | ||||||||
| Subtotal | $ | $ | ||||||
| Deferred tax provision (benefit) | ||||||||
| Cayman | $ | $ | ||||||
| Hong Kong | ||||||||
| PRC | ( | ) | ||||||
| Total income tax provision | $ | $ | ||||||
The following table reconciles the China statutory rates to the Company’s effective tax rate for the six months ended March 31, 2022 and 2021:
| For the Six Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Statutory PRC income tax rate | % | % | ||||||
| Effect of income tax holiday | % | ( | )% | |||||
| Permanent difference | % | % | ||||||
| Non-PRC entities not subject to PRC income tax | ( | )% | % | |||||
| Impact on DTA due to change in applicable income tax rate | ( | )% | % | |||||
| Change in valuation allowance | % | % | ||||||
| Total | % | % | ||||||
The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. As of March 31, 2022, all of the Company’s tax returns of its PRC subsidiaries remain open for statutory examination by PRC tax authorities.
Deferred tax assets are composed of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry-forwards | $ | $ | ||||||
| Allowance for doubtful accounts | ||||||||
| Total | ||||||||
| Valuation allowance | ||||||||
| Total deferred tax assets | $ | $ | ||||||
F-25
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 — TAXES (continued)
The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. Management considers new evidence, both positive and negative, that could affect the Company’s future realization of deferred tax assets including its recent cumulative earnings experience, expectation of future income, the carry forward periods available for tax reporting purposes and other relevant factors. Although Jiangxi Universe incurred a net loss during the six months ended March 31, 2022, the Company determined that it is more likely than not that its deferred tax assets could be realized due to the estimated future earnings in Jiangxi Universe.
| (b) | Taxes payable |
Taxes payable consist of the following:
| March 31, 2022 | September 30, 2021 | |||||||
| Income tax payable | $ | $ | ||||||
| Value added tax payable | ||||||||
| Other taxes payable | ||||||||
| Total taxes payable | $ | $ | ||||||
NOTE 15 — CONCENTRATIONS
A majority of the Company’s revenue and expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
As
of March 31, 2022 and September 30, 2021, $
For
the six months ended March 31, 2022 and 2021, no single customer accounted for more than
Sales
of one of the Company’s major products, Guben Yanling Pill, accounted for
As
of March 31, 2022 and September 30, 2021, no customer accounted for more than
As
of March 31, 2022, two suppliers accounted for
For
the six months ended March 31, 2022, no supplier accounted for more than
F-26
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 — SHAREHOLDERS’ EQUITY
Ordinary Shares
Universe
INC was incorporated under the laws of the Cayman Islands on December 11, 2019. The original authorized number of ordinary shares was
Initial Public Offering
On
March 25, 2021, the Company closed its IPO of
As
of March 31, 2022 and September 30, 2021, the Company had total of
Underwriter warrants
In
connection with the Company’s IPO, the Company also agreed to issue warrants to the underwriter, for a nominal consideration of
$
Cash dividends
On
September 21, 2016, September 13, 2017, February 2, 2018, September 20, 2018 and February 21, 2019, the board of directors of Jiangxi
Universe approved resolutions to pay cash dividends of RMB
F-27
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 — SHAREHOLDERS’ EQUITY (continued)
Except for the dividends declared mentioned above, the Company has not declared or paid dividends to its shareholders in the past, and may not choose to make additional distributions in the future. Any decision as to the payment of dividends will depend on the available earnings, the capital requirements of the Company, the Company’s general financial condition and other factors deemed pertinent by the board of directors.
Statutory reserve and restricted net assets
The Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China.
The
Company is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus
reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC
GAAP”). Appropriations to the statutory surplus reserve are required to be at least
Relevant
PRC laws and regulations restrict the Company’s PRC subsidiaries from transferring a portion of their net assets, equivalent to
their statutory reserves and their share capital, to the Company in the form of loans, advances or cash dividends. Only PRC entities’
accumulated profits may be distributed as dividends to the Company without the consent of a third party. As of March 31, 2022 and September
30, 2021, the restricted amounts as determined pursuant to PRC statutory laws totaled $
Cash transfer between the Company and its subsidiaries
For
the six months ended March 31, 2022, the Company received cash in the amount of $
NOTE 17 — COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. For the six months ended March 31, 2022 and 2021, the Company did not have any material legal claims or litigation that, individually or in aggregate, could have a material adverse impact on the Company’s consolidated financial position, results of operations and cash flows.
The
Company has an ongoing CIP project associated with the construction of a new manufacturing facility. As of March 31, 2022, future minimum
capital expenditures on the Company’s CIP project amounted to approximately $
F-28
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 — SEGMENT REPORTING
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, and is identified on the basis of the internal financial reports that are provided to, and regularly reviewed by, the Company’s chief operating decision maker in order to allocate resources and assess performance of the segment.
The
management of the Company concludes that it has only
The
Company’s products have similar economic characteristics with respect to raw materials, vendors, marketing and promotions, customers
and methods of distribution. The Company’s chief operating decision maker has been identified as the Chief Executive Officer, who
reviews consolidated results when making decisions about allocating resources and assessing performance of the Company, rather than by
product types or geographic area; hence the Company has only
Revenue by product source
| For the six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sales of TCMD products manufactured by the Company | $ | $ | ||||||
| Sales of third-party products | ||||||||
| Total revenue | $ | $ | ||||||
Revenue by product categories
The summary of our total revenues by product categories for the six months ended March 31, 2022 and 2021 was as follows:
| For the six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sales of TCMD products: | ||||||||
| Medicinal liquor products | $ | $ | ||||||
| Other chronic condition treatment products | ||||||||
| Cold and flu medicines | ||||||||
| Sub-total of TCMD products sales | ||||||||
| Sales of third-party products | ||||||||
| Biochemical drugs | ||||||||
| Traditional Chinese medicine pieces | ||||||||
| Medical instruments | ||||||||
| Dietary supplements | ||||||||
| Subtotal of third-party products sales | ||||||||
| Total revenue | $ | $ | ||||||
F-29
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — SUBSEQUENT EVENTS
On
June 15, 2022, the Company’s subsidiary, Jiangxi Universe, entered into a loan agreement with LRC Bank to borrow RMB
On
June 24, 2022, the Company’s subsidiary, Jiangxi Universe, signed a loan agreement with Bank of Communications to borrow RMB
The Company evaluated the subsequent event through the date of this report, and concluded that there are no material reportable subsequent events need to be disclosed.
NOTE 20 — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Pursuant
to the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, the condensed financial information of the parent company
shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end
of the most recently completed fiscal year. The Company performed a test on the restricted net assets of consolidated subsidiaries in
accordance with such requirement and concluded that it was applicable to the Company as the restricted net assets of the Company’s
subsidiaries exceeded
For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the Company’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party.
The condensed financial information of the parent company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the parent company used the equity method to account for investment in its subsidiaries. Such investment is presented on the condensed balance sheets as “Investment in subsidiaries” and the respective profit or loss as “Equity in earnings of subsidiaries” on the condensed statements of income.
The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the unaudited condensed consolidated financial statements of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S GAAP have been condensed or omitted.
As of March 31, 2022 and September 30, 2021, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except for those which have been separately disclosed in the unaudited condensed consolidated financial statements, if any.
F-30
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
PARENT COMPANY BALANCE SHEETS
| March 31, 2022 | September 30, 2021 | |||||||
| ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Short-term investments | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Investment in subsidiaries | $ | $ | ||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| LIABILITIES | $ | $ | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares, $ | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
F-31
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
PARENT COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| For the six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating costs and expenses: | ||||||||
| General and administrative expenses | $ | ( | ) | $ | ||||
| Other income (expenses): | ||||||||
| Income from short-term investments | ||||||||
| Other expenses | ( | ) | ( | ) | ||||
| Equity in earnings of subsidiaries | ||||||||
| Net income | ||||||||
| Foreign currency translation adjustments | ||||||||
| Comprehensive income attributable to the Company | $ | $ | ||||||
UNIVERSE PHARMACEUTICALS INC. AND SUBSIDIARIES
PARENT COMPANY STATEMENTS OF CASH FLOWS
| For the six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net cash flows from operating activities: | ||||||||
| Equity in earnings of subsidiary | ( | ) | ( | ) | ||||
| Short-term investment income | ( | ) | - | |||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net proceeds from issuance of ordinary shares in IPO | - | |||||||
| Cash lent to subsidiaries | - | ( | ) | |||||
| Cash repayment from subsidiaries | - | |||||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF CHANGES OF FOREIGN EXCHANGE RATES ON CASH | ( | ) | ( | ) | ||||
| CHANGES IN CASH | ( | ) | ||||||
| CASH, beginning of period | ||||||||
| CASH, end of period | $ | $ | ||||||
F-32