Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear elsewhere in the report on Form 6-K of which this document is a part. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in our annual report on Form 20-F for the fiscal year ended September 30, 2022, particularly under the caption “Item 3. Key Information—D. Risk Factors.”
Overview
Through its subsidiaries (the “PRC operating entities”) in the People’s Republic of China (“China” or the “PRC”), Universe Pharmaceuticals INC (the “Company,” “we,” “our” and “us”) is a pharmaceutical company specializing in the development, manufacturing, marketing and sale of traditional Chinese medicine derivatives (“TCMD”) products targeted to the elderly to address their physical conditions in the aging process and to promote their general well-being. We have registered and obtained approval for 26 varieties of TCMD products from the National Medical Products Administration (the “NMPA”), and we currently produce 13 varieties of TCMD products and sell them in 261 cities in 30 provinces in China as of the date of this report. In addition, we also sell biomedical drugs, medical instruments, traditional Chinese medicine pieces (“TCMPs”) and dietary supplements manufactured by third-party pharmaceutical companies (collectively referred to as “third-party products”).
Our major customers are pharmaceutical companies, hospitals, clinics and drugstore chains, primarily located in Jiangxi Province, Jiangsu Province, Guangdong Province, Hubei Province, Fujian Province, Guangxi Province and Shandong Province, and 23 other provinces in China.
Key Financial Performance Indicators
In assessing our financial performance, we consider a variety of financial performance measures, including principal growth in net revenue and gross profit, our ability to control costs and operating expenses to improve our operating efficiency and net income. Our review of these indicators facilitates timely evaluation of the performance of our business and effective communication of results and key decisions, allowing our business to respond promptly to competitive market conditions and different demands and preferences from our customers. The key measures that we use to evaluate the performance of our business are set forth below.
Net Revenue
Our revenue is reported net of all value added taxes (“VAT”). Our products are sold with no right of return and we do not provide other credits or sales incentive to customers. Our revenue is driven by sales volume, selling price, and mix of products sold.
| | | For the Six Months Ended
March 31, | | | Variance | |
| | | 2023 | | | 2022 | | | % | |
| Revenue from sales of self-manufactured TCMD products | | | 50.8 | % | | | 63.4 | % | | | 12.6 | % |
| Revenue from sales of third-party products | | | 49.2 | % | | | 36.6 | % | | | (12.6 | )% |
| Total revenue | | | 100.0 | % | | | 100.0 | % | | | | |
| | | | | | | | | | | | | |
| Sales volume by unit- TCMD products | | | 7,961,244 | | | | 6,966,256 | | | | 14.3 | % |
| Sales volume by unit- third party products | | | 5,727,501 | | | | 4,763,265 | | | | 20.2 | % |
| Total sales volume | | | 13,688,745 | | | | 11,729,521 | | | | 16.7 | % |
| | | | | | | | | | | | | |
| Average selling price per unit- TCMD products | | $ | 1.18 | | | $ | 2.20 | | | | (46.4 | )% |
| Average selling price per unit- Third-party products | | $ | 1.59 | | | $ | 1.86 | | | | (14.5 | )% |
Revenues from sales of TCMD products manufactured by us accounted for 50.8% and 63.4% of our total revenues for the six months ended March 31, 2023 and 2022, respectively. The 13 TCMD products manufactured by us fall into two categories: (i) treatment and relief for common chronic health conditions in the elderly designed to achieve physical wellness and longevity (the “Chronic Condition Treatments”) and (ii) cold and flu medications. Our Chronic Condition Treatments primarily include Guben Yanling Pill, Shenrong Weisheng Pill, Quanlu Pill, Yangxue Danggui Syrup, Wuzi Yanzong Oral Liquid, Fengtong Medicinal Liquor, Shenrong Medicinal Liquor, Qishe Medicinal Liquor, Fengshitong Medicinal Liquor, and Shiquan Dabu Medicinal Liquor, and our cold and flu medications primarily include Paracetamol Granule for Children, Isatis Root Granule and Qiangli Pipa Syrup.
In order to diversify our product offerings and product mix, in addition to selling our self-manufactured TCMD products, we also sell products manufactured by third-party pharmaceutical companies, including (i) biomedical drugs, such as liquid glucose, prednisolone, and citicoline, (ii) medical instruments, such as drug-eluting stents, surgical tubes and syringes, (iii) TCMPs, such as red sage tables, Longdan Xiegan pills, and Chinese skullcap capsules, and (iv) dietary supplements, such as vitamins, probiotic powder, and calcium tablets.
Gross Profit
Gross profit is equal to net revenue minus cost of goods sold. Cost of goods sold primarily includes inventory costs (raw materials, labor, packaging cost, depreciation and amortization, third-party products purchase price, freight costs and overhead). Cost of goods sold generally changes as our production costs change, as these are affected by factors including the market price of raw materials, labor productivity, or the purchase price of third-party products, and as the customer and product mix changes. Our cost of revenues accounted for 66.8% and 43.2% of our total revenue for the six months ended March 31, 2023 and 2022, respectively. We expect our cost of revenues to increase as we further expand our operations in the foreseeable future.
Our gross margin was 33.2% for the six months ended March 31, 2023, a decrease by 23.6% from the gross margin of 56.8% in the six months ended March 31, 2022, due to decrease in the average selling price of our TCMD products and third-party products by 46.4% and 14.5%, respectively. Slowdown in the Chinese economy caused by the COVID-19 pandemic has led to a decline in customers’ spending power, and we changed our pricing strategy to increase sales volume and market share during this challenging period.
Operating Expenses
Our operating expenses consist of selling expenses, general and administrative expenses and research and development expenses.
Our selling expenses primarily include salary and welfare benefit expenses paid to our sales personnel, advertising expenses to increase the awareness of our brand, shipping and delivery expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses. Our selling expenses accounted for 12.6% and 37.5% of our total revenue for the six months ended March 31, 2023 and 2022, respectively. We expect our overall selling expenses, including but not limited to, advertising expenses and brand promotion expenses and salaries, to increase in the foreseeable future and facilitate the growth of our business, especially when we continue to expand our business and promote our products to customers located at extended geographic areas.
Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation, bad debt reserve expenses, inspection and maintenance expenses, office supply and utility expenses, business travel and meals expenses, land and property taxes and professional service expenses. General and administrative expenses were 7.5% and 7.6% of our revenue for the six months ended March 31, 2023 and 2022, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, to increase in the foreseeable future, as we plan to hire additional personnel and incur additional expenses in connection with the expansion of our business operations.
The Chinese patent medicine industry is characterized by rapid and frequent changes in customer demand and launches of new products. If we do not launch new products or improve our existing products to meet the changing demands of our customers in a timely manner, some of our products could become uncompetitive in the market, thereby adversely affecting on our revenues and operating results. Our research and development expenses primarily consist of salaries, welfare and insurance expenses paid to our employees involved in the research and development activities, materials and supplies used in the development and testing of new TCMD products, depreciation, and other miscellaneous expenses. Research and development expenses were 12.3% and 0.6% of our revenue for the six months ended March 31, 2023 and 2022 respectively. As we continue to develop new products and diversify our product offerings to satisfy customer demand, we expect our research and development expenses to continue to increase in the foreseeable future.
Financial Results for the Six Months Ended March 31, 2023 Compared to the Six Months Ended March 31, 2022
The following table summarizes the results of our operations during the six months ended March 31, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
| | | For the Six Months Ended March 31, | |
| | | 2023 | | | 2022 | | | Variance | |
| | | Amount | | | % of
revenue | | | Amount | | | % of
revenue | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | |
| REVENUE | | $ | 18,467,186 | | | | 100.0 | % | | $ | 24,202,340 | | | | 100.0 | % | | $ | (5,735,154 | ) | | | (23.7 | )% |
| COST OF REVENUE | | | 12,339,044 | | | | 66.8 | % | | | 10,445,906 | | | | 43.2 | % | | | 1,893,138 | | | | 18.1 | % |
| GROSS PROFIT | | | 6,128,142 | | | | 33.2 | % | | | 13,756,434 | | | | 56.8 | % | | | (7,628,292 | ) | | | (55.5 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling expenses | | | 2,330,508 | | | | 12.6 | % | | | 9,079,771 | | | | 37.5 | % | | | (6,749,263 | ) | | | (74.3 | )% |
| General and administrative expenses | | | 1,380,053 | | | | 7.5 | % | | | 1,830,923 | | | | 7.6 | % | | | (450,870 | ) | | | (24.6 | )% |
| Research and development expenses | | | 2,268,335 | | | | 12.3 | % | | | 144,461 | | | | 0.6 | % | | | 2,123,874 | | | | 1,470.2 | % |
| Total operating expenses | | | 5,978,896 | | | | 32.4 | % | | | 11,055,155 | | | | 45.7 | % | | | (5,076,259 | ) | | | (45.9 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| INCOME FROM OPERATIONS | | | 149,246 | | | | 0.8 | % | | | 2,701,279 | | | | 11.2 | % | | | (2,552,033 | ) | | | (94.5 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense, net | | | (74,569 | ) | | | (0.4 | )% | | | (88,389 | ) | | | (0.4 | )% | | | 13,820 | | | | (15.6 | )% |
| Other income, net | | | 17,323 | | | | 0.1 | % | | | 634 | | | | 0.0 | % | | | 16,689 | | | | 2,632.3 | % |
| Equity investment income | | | 166,931 | | | | 0.9 | % | | | 696,430 | | | | 2.9 | % | | | (529,499 | ) | | | (76.0 | )% |
| Total other income, net | | | 109,685 | | | | 0.6 | % | | | 608,675 | | | | 2.5 | % | | | (498,990 | ) | | | (82.0 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| INCOME BEFORE INCOME TAX PROVISION | | | 258,931 | | | | 1.4 | % | | | 3,309,954 | | | | 13.7 | % | | | (3,051,023 | ) | | | (92.2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| PROVISION FOR INCOME TAXES | | | 974,358 | | | | 5.3 | % | | | 1,578,219 | | | | 6.5 | % | | | (603,861 | ) | | | (38.3 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| NET INCOME | | $ | (715,427 | ) | | | (3.9 | )% | | $ | 1,731,735 | | | | 7.2 | % | | $ | (2,447,162 | ) | | | (141.3 | )% |
Revenues. We currently produce and sell 13 varieties of TCMD products and also sell products manufactured by third-party pharmaceutical companies, to our customers.
| | | For the six months ended March 31, | |
| | | 2023 | | | 2022 | | | Change | |
| | | Amount | | | Amount | | | Amount | | | % | |
| | | | | | | | | | | | | |
| Revenue - TCMD products sales | | $ | 9,374,312 | | | $ | 15,354,635 | | | $ | (5,980,323 | ) | | | (38.9 | )% |
| Revenue – third-party products sales | | | 9,092,874 | | | | 8,847,705 | | | | 245,169 | | | | 2.8 | % |
| Total revenue | | $ | 18,467,186 | | | $ | 24,202,340 | | | $ | (5,735,154 | ) | | | (23.7 | )% |
Our revenues decreased by $5,735,154, or 23.7%, to $18,467,186 for the six months ended March 31, 2023, from $24,202,340 for the six months ended March 31, 2022.
Revenue from sales of our TCMD products
Sales of TCMD products decreased by $5,980,323, or 38.9%, to $9,374,312 for the six months ended March 31, 2023, from $15,354,635 for the six months ended March 31, 2022. The decrease in the sales of our TCMD product was due to the following specific reasons:
| a) | Slowdown in economy caused by the COVID-19 pandemic has led to a decline in customers’ spending power, and we changed our pricing strategy to increase sales volume and market share during this challenging period. Average selling price of our TCMD products decreased by $1.02 per unit, or 46.4%, to $1.18 per unit in the six months ended March 31, 2023, from $2.20 per unit in the six months ended March 31, 2022. |
| b) | As a result of our new pricing strategy, sales volume of TCMD products increased by 14.3%, to 7,961,244 units sold in the six months ended March 31, 2023, from 6,966,256 units sold in the six months ended March 31, 2022. |
| c) | The exchange rate between RMB and US$ was US$1.00 to RMB6.3717 in the six months ended March 31, 2022 as compared to US$1.00 to RMB6.9761 in the six months ended March 31, 2023. The depreciation of RMB against US$ had a 9.5% negative impact on our reported revenues. |
Revenue from sales of third-party products
Sales of third-party products slightly increased by $245,169, or 2.8%, to $9,092,874 for the six months ended March 31, 2023, from $8,847,705 for the six months ended March 31, 2022. Sales volume of third-party products increased by 20.2%, to 5,727,501 units sold in the six months ended March 31, 2023, from 4,763,265 units sold in the six months ended March 31, 2022. Average selling price of third-party products decreased by $0.27 per unit, or 14.5%, to $1.59 per unit in the six months ended March 31, 2023, from $1.86 per unit in the six months ended March 31, 2022, due to a change in our pricing strategy and the 9.5% negative impact from foreign currency fluctuation as discussed above.
Cost of Revenues. Our cost of revenues primarily consists of inventory costs (raw materials, labor, packaging cost, depreciation and amortization, third-party products purchase price, freight costs and overhead) and business tax. Cost of revenues generally changes as our production costs change, which are affected by factors including the market price of raw materials, labor productivity, and the purchase price of third-party products, and as the customer and product mix changes.
| | | For the six months ended March 31, | |
| | | 2023 | | | 2022 | | | Change | |
| | | Amount | | | Amount | | | Amount | | | % | |
| | | | | | | | | | | | | |
| Cost of revenue- TCMD products | | $ | 6,617,444 | | | $ | 4,953,950 | | | $ | 1,663,494 | | | | 33.6 | % |
| Cost of revenue- third-party products | | | 5,721,600 | | | | 5,491,956 | | | | 229,644 | | | | 4.2 | % |
| Total cost of revenue | | $ | 12,339,044 | | | $ | 10,445,906 | | | $ | 1,893,138 | | | | 18.1 | % |
Cost of revenues increased by $1,893,138, or 18.1%, to $12,339,044 for the six months ended March 31, 2023, from $10,445,906 for the six months ended March 31, 2022, due to an increase in sales volume and rising prices of traditional Chinese medicine raw materials caused by the imbalance between supply and demand starting from the fourth quarter of 2022.
Cost of revenues of TCMD products
Cost of revenues of TCMD products accounted for 53.6% and 47.4% of our total costs of revenues for the six months ended March 31, 2023 and 2022, respectively. Cost of revenues of TCMD products increased by $1,663,494, or 33.6%, from $4,953,950 in the six months ended March 31, 2022 to $6,617,444 in the six months ended March 31, 2023. The increase in cost of revenues of our TCMD products was due to the following reasons:
| (1) | As a result of our new pricing strategy to promote sales, sales volume of TCMD products increased by 14.3%, to 7,961,244 units sold in the six months ended March 31, 2023, from 6,966,256 units sold in the six months ended March 31, 2022. |
| (2) | A severe drought in the Yangtze River Basin in China in 2022 led to a decrease in the supply of traditional Chinese medicinal materials, and the COVID-19 pandemic resulted in increased demand of traditional Chinese medicinal materials for recuperating and improving immunity. Due to imbalance between supply and demand starting from the fourth quarter of 2022, prices of the traditional Chinese medicine raw materials increased by about 19% for the six months ended march 31, 2023 as compared to the six months ended March 31, 2022. Average unit cost of our TCMD products increased by $0.12, or 16.9%, from $0.71 per unit in the six months ended March 31, 2022 to $0.83 per unit in the six months ended March 31, 2023. |
| (3) | The exchange rate between RMB and US$ was US$1.00 to RMB6.3717 in the six months ended March 31, 2022 as compared to US$1.00 to RMB6.9761 in the six months ended March 31, 2023. The depreciation of RMB against US$ had a 9.5% negative impact on our cost of revenue. |
Cost of revenues of third-party products
Cost of revenues of third-party products accounted for 46.4% and 52.6% of our total costs of revenues for the six months ended March 31, 2023 and 2022, respectively. Cost of revenues of third-party products increased by $229,644, or 4.2%, from $5,491,956 in the six months ended March 31, 2022 to $5,721,600 in the six months ended March 31, 2023, because of increase in sales volume of third-party products by 20.2% from 4,763,265 units sold in the six months ended March 31, 2022 to 5,727,501 units sold in the six months ended March 31, 2023. Average unit cost of third-party products decreased by $0.15 per unit, or 13.0%, from $1.15 per unit in the six months ended March 31, 2022 to $1.00 per unit in the six months ended March 31, 2023, due to change in product mix and the 9.5% negative impact from foreign currency fluctuation as discussed above.
Gross profit
Our gross profit decreased by $7,628,292 to $6,128,142 for the six months ended March 31, 2023, from $13,756,434 for the six months ended March 31, 2022. Our margin decreased by 23.6% to 33.2% for the six months ended March 31, 2023, from 56.8% for the six months ended March 31, 2022.
| | | For the six months ended March 31, | |
| | | 2023 | | | 2022 | | | Change | |
| | | Amount | | | Amount | | | Amount | | | % | |
| | | | | | | | | | | | | |
| Gross profit- TCMD products | | $ | 2,756,868 | | | $ | 10,440,685 | | | $ | (7,643,817 | ) | | | (73.5 | )% |
| Gross profit- third-party products | | | 3,371,274 | | | | 3,355,749 | | | | 15,525 | | | | 0.5 | % |
| Total gross profit | | $ | 6,128,142 | | | $ | 13,756,434 | | | $ | (7,628,292 | ) | | | (55.5 | )% |
| | | | | | | | | | | | | | | | | |
| Gross margin- TCMD products | | | 29.4 | % | | | 67.7 | % | | | | | | | (38.3 | )% |
| Gross margin- third party products | | | 37.1 | % | | | 37.9 | % | | | | | | | (0.8 | )% |
| Total gross margin | | | 33.2 | % | | | 56.8 | % | | | | | | | (23.7 | )% |
| | | | | | | | | | | | | | | | | |
| Average selling price per unit- TCMD products | | $ | 1.18 | | | $ | 2.20 | | | $ | (1.02 | ) | | | (46.4 | )% |
| Average cost per unit- TCMD products | | $ | 0.83 | | | $ | 0.71 | | | $ | 0.12 | | | | 16.9 | % |
| | | | | | | | | | | | | | | | | |
| Average selling price per unit- third party products | | $ | 1.59 | | | $ | 1.86 | | | $ | (0.27 | ) | | | (14.5 | )% |
| Average cost per unit - third party products | | $ | 1.00 | | | $ | 1.15 | | | $ | (0.15 | ) | | | (13.0 | )% |
Gross profit from the sales of our TCMD products decreased by $7,643,817, or 73.5%, from $10,400,685 in the six months ended March 31, 2022 to $2,756,868 in the six months ended March 31, 2023, and the gross margin of our TCMD products decreased by 38.3 percentage point, from 67.7% in the six months ended March 31, 2022 to 29.4% in the six months ended March 31, 2023. The decrease in our gross profit from the sales of TCMD products was due to the following reasons: (i) as discussed above, we changed our pricing strategy to promote sales, and average selling price of our TCMD products decreased by $1.02 per unit, or 46.4%, to $1.18 per unit in the six months ended March 31, 2023, from $2.20 per unit in the six months ended March 31, 2022; (ii) average unit cost of our TCMD products increased by $0.12, or 16.9%, from $0.71 per unit in the six months ended March 31, 2022 to $0.83 per unit in the six months ended March 31, 2023, due to increased price of traditional Chinese medicine raw materials, and (iii) the depreciation of RMB against US$ had a 9.5% negative impact on our gross profit from sales of TCMD products.
Gross profit from third-party product sales increased slightly by $15,525, or 0.5%, from $3,355,749 in the six months ended March 31, 2022 to $3,371,274 in the six months ended March 31, 2023, while the gross margin of third-party product sales slightly decreased by 0.8%, from 37.9% in the six months ended March 31, 2022 to 37.1% in the six months ended March 31, 2023. The increase in our gross profit from third-party products was affected by the increase in sales volume and average unit selling price, and partially offset by the decrease in average unit cost and 9.5% negative impact from foreign currency fluctuation. The average unit selling price of third-party products decreased by 14.5%, or $0.27 per unit, while the average unit cost of third-party products also decreased by 13.0%, or $0.15 per unit.
Operating expenses
The following table sets forth the breakdown of our operating expenses for the six months ended March 31, 2023 and 2022:
| | | For the six months ended March 31, | |
| | | 2023 | | | 2022 | | | Variance | |
| | | Amount | | | % of
revenue | | | Amount | | | % of
revenue | | | Amount | | | % | |
| Total revenue | | $ | 18,467,186 | | | | 100.0 | % | | $ | 24,202,340 | | | | 100.0 | % | | $ | (5,735,154 | ) | | | (23.7 | )% |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling expenses | | | 2,330,508 | | | | 12.6 | % | | | 9,079,771 | | | | 37.5 | % | | | (6,749,263 | ) | | | (74.3 | )% |
| General and administrative expenses | | | 1,380,053 | | | | 7.5 | % | | | 1,830,923 | | | | 7.6 | % | | | (450,870 | ) | | | (24.6 | )% |
| Research and development expenses | | | 2,268,335 | | | | 12.3 | % | | | 144,461 | | | | 0.6 | % | | | 2,123,874 | | | | 1,470.2 | % |
| Total operating expenses | | $ | 5,978,896 | | | | 32.4 | % | | $ | 11,055,155 | | | | 45.7 | % | | $ | (5,076,259 | ) | | | (45.9 | )% |
Selling expenses
Our selling expenses primarily include salaries and welfare benefit expenses paid to our sales personnel, advertising expenses to increase our brand awareness, shipping and delivery expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses.
| | | For the six months ended March 31, | |
| | | 2023 | | | 2022 | | | Variance | |
| | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | |
| Salary and employee benefit expenses | | $ | 349,755 | | | | 15.0 | % | | $ | 447,162 | | | | 5.0 | % | | $ | (97,407 | ) | | | (21.8 | )% |
| Advertising expenses | | | 1,340,368 | | | | 57.5 | % | | | 8,219,488 | | | | 90.5 | % | | | (6,879,120 | ) | | | (83.7 | )% |
| Shipping and delivery expenses | | | 559,882 | | | | 24.0 | % | | | 347,908 | | | | 3.8 | % | | | 211,974 | | | | 60.9 | % |
| Business travel and meals expenses | | | 71,535 | | | | 3.1 | % | | | 57,488 | | | | 0.6 | % | | | 14,047 | | | | 24.4 | % |
| Other sales promotion related expenses | | | 8,968 | | | | 0.4 | % | | | 7,725 | | | | 0.1 | % | | | 1,243 | | | | 16.1 | % |
| Total selling expenses | | $ | 2,330,508 | | | | 100.0 | % | | $ | 9,079,771 | | | | 100.0 | % | | $ | (6,749,263 | ) | | | (74.3 | )% |
Our selling expenses decreased by $6,749,263, or 74.3%, to $2,330,508 for the six months ended March 31, 2023, from $9,079,771 for the six months ended March 31, 2022, primarily attributable to (i) a decrease in advertising expenses by $6,879,120, or 83.7%, from $8,219,488 in the six months ended March 31, 2022, to $1,340,368 in the six months ended March 31, 2023. In September 2021, we entered into an advertising service agreement with a third party, Guangdong Fengyang Legend Consulting Co., Ltd. (“Fengyang Legend”) to promote the sales of our major TCMD products, Bai Nian Dan and Guben Yanling Pill with a service period of one year, from October 1, 2021 to September 30, 2022. In March 2022, we entered into an advertising service agreement with a third-party, Health Headline to promote our brand on the Health Headline’s website and mobile app, with a service period of ten months from March 1, 2022 to December 31, 2022. As these agreements expired in September and December 2022, respectively, advertising expenses decreased significantly in the six months ended March 31, 2023; and (ii) partially offset by an increase in shipping and delivery expenses by $211,974, or 60.9%, from $347,908 in the six months ended March 31, 2022 to $559,882 in the six months ended March 31, 2023, due to an increase in our sales volume and increased freight cost caused by the COVID-19 pandemic and rising fuel prices during the six months ended March 31, 2023.
General and Administrative Expenses
Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation, bad debt reserve expenses, inspection and maintenance expenses, office supply and utility expenses, business travel and meals expenses, land and property taxes and professional service expenses.
| | | For the six months ended March 31, | |
| | | 2023 | | | 2022 | | | Variance | |
| | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | |
| | | | | | | | | | | | | | | | | | | |
| Salary and employee benefit expense | | $ | 305,163 | | | | 22.1 | % | | $ | 345,344 | | | | 18.9 | % | | $ | (40,181 | ) | | | (11.6 | )% |
| Depreciation and amortization | | | 91,279 | | | | 6.6 | % | | | 113,962 | | | | 6.2 | % | | | (22,683 | ) | | | (19.9 | )% |
| Bad debt reserve expenses (recovery) | | | 0 | | | | 0.0 | % | | | 484,811 | | | | 26.5 | )% | | | (484,811 | ) | | | (100.0 | )% |
| Land and property tax | | | 48,739 | | | | 3.5 | % | | | 53,348 | | | | 2.9 | % | | | (4,609 | ) | | | (8.6 | )% |
| Office supply and utility expense | | | 338,735 | | | | 24.5 | % | | | 255,627 | | | | 14.0 | % | | | 83,108 | | | | 32.5 | % |
| Transportation, business travel and meals expense | | | 51,530 | | | | 3.7 | % | | | 50,217 | | | | 2.7 | % | | | 1,313 | | | | 2.6 | % |
| Consulting fee | | | 503,046 | | | | 36.5 | % | | | 474,026 | | | | 25.9 | % | | | 29,020 | ) | | | 6.1 | % |
| Inspection and maintenance fee | | | 21,701 | | | | 1.6 | % | | | 29,695 | | | | 1.6 | % | | | (7,994 | ) | | | (26.9 | )% |
| Stamp tax and other expenses | | | 19,860 | | | | 1.5 | % | | | 23,893 | | | | 1.3 | % | | | (4,033 | ) | | | (16.9 | )% |
| Total general and administrative expenses | | $ | 1,380,053 | | | | 100.0 | % | | $ | 1,830,923 | | | | 100.0 | % | | $ | (450,870 | ) | | | (24.6 | )% |
General and administrative expenses decreased by $450,870, or 24.6%, to $1,380,053 for the six months ended March 31, 2023 from $1,830,923 for the six months ended March 31, 2022, primarily attributable to (i) a decrease in bad debt expense by $484,811, because we accrued less bad debt expenses based on our assessment of the collectability of the accounts receivable and advance to suppliers; (ii) a decrease in our salaries, welfare expenses and insurance expenses paid to administration employees by $40,181, or 11.6%, because of lower amount of annual bonus and welfare expenses in the six months ended March 31, 2023 as compared to the six months ended March 31, 2022, and (iii) partially offset by an increase in office supply and utility expense by $83,108, or 32.5% due to the registration fees paid to U.S. Securities and Exchange Commission and annual listings fees paid to Nasdaq Stock Market for the six months ended March 31, 2023.
Research and development expenses
Our research and development expenses primarily consist of salaries, welfare and insurance expenses paid to our employees involved in the research and development activities, materials and supplies used in the development and testing new TCMD products, depreciation and other miscellaneous expenses.
| | | For the six months ended March 31, | |
| | | 2023 | | | 2022 | | | Variance | |
| | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | |
| Salary and employee benefit expenses to research and development staff | | $ | 74,073 | | | | 3.3 | % | | $ | 82,198 | | | | 56.9 | % | | $ | (8,125 | ) | | | (9.9 | )% |
| Materials used in research and development activities | | | 666,765 | | | | 29.4 | % | | | 52,262 | | | | 36.2 | % | | | 614,503 | | | | 1175.8 | % |
| Expenditure on new product development | | | 1,505,144 | | | | 66.4 | | | | - | | | | - | | | | 1,505,144 | | | | - | |
| Depreciation and others | | | 22,353 | | | | 0.9 | % | | | 10,001 | | | | 6.9 | % | | | 12,352 | | | | 123.5 | % |
| Total research and development expenses | | $ | 2,268,335 | | | | 100.0 | % | | $ | 144,461 | | | | 100.0 | % | | $ | 2,123,874 | | | | 1470.2 | % |
Research and development expenses increased by $2,123,874, or 1,470.2%, to $2,268,335 for the six months ended March 31, 2023, from $144,461 for the six months ended March 31, 2022, primarily attributable to (i) an increase in research and development expense of $1,505,144 to develop and test eight new Chinese medicine products in order to diversify our future product portfolio. We entered into several cooperative agreements with external academic and research institutions to jointly conduct the new product development with activities beginning in August 2022. Accordingly, we incurred significant amount of research and development expense in connection with such efforts during the six months ended March 31, 2023; and (ii) an increase in the materials used in the research and development activities by $614,503. In order to develop new products and improve the formulation of several existing products, we conducted more testing on product stability and safety, and as a result, more materials were used in R&D activities for the six months ended March 31, 2023 than the six months ended March 31, 2022.
Other income (expenses), net
Total other expenses, net, decreased by $498,990, or 82.0%, to $109,685 for the six months ended March 31, 2023 from $608,675 for the six months ended March 31, 2022 primarily attributable to a decrease of $529,499 in short-term investment income from wealth management financial products.
Provision for Income Taxes
Provision for income taxes was $974,358 for the six months ended March 31, 2023, representing a decrease of $603,861, or 38.3%, from $1,578,219 for the six months ended March 31, 2022 due to decreased taxable income.
Net Income
Net loss was $715,427 for the six months ended March 31, 2023, representing a $2,447,162 decrease from a net income of $1,731,735 for the six months ended March 31, 2022.
Liquidity and Capital Resources
As of March 31, 2023, we had $12.9 million in cash on hand. We also had short-term investments of $13.3 million in wealth management financial products from financial institutions to generate investment income, which we purchased with our IPO proceeds. Such short-term investment can be redeemed anytime at our discretion and is highly liquid. As of March 31, 2023, we also had $17.5 million in accounts receivable. Our accounts receivable primarily include balance due from customers for our pharmaceutical products sold and delivered to customers. Approximately 77.6%, or $14.2 million, of our net accounts receivable balance as of March 31, 2023 has been subsequently collected. Collected accounts receivable will be used as working capital in our operations, if necessary.
As of March 31, 2023, our inventory balance amounted to $2.8 million, primarily consisting of raw materials, work-in-progress and finished TCMD products, which we believe are able to be sold quickly based on the analysis of the current trends in demand for our products.
On June 25, 2021, we signed a construction sub-contract with sub-contractor Jiangxi Chenyuan Construction Project Co., Ltd. (“Chenyuan”), pursuant to which, Chenyuan will help us construct four manufacturing plant buildings and an office building with a total estimated budget of RMB165 million (approximately $24.0 million). As of March 31, 2023, we had made a prepayment of approximately RMB69.2 million (approximately $10.1 million) to Chenyuan and future additional capital expenditure on this constriction-in-process (“CIP”) project was estimated to be approximately RMB95.8 million (equivalent to $13.9 million), among which approximately $3.6 million is required for the next 12 months. We currently plan to support our ongoing CIP project through cash flows from operations, proceeds received from the IPO, and borrowings from banks, if necessary.
On May 6, 2021, we entered into a real estate property purchase agreement with a related party, Jiangxi Yueshang Investment Co., Ltd. (“Jiangxi Yueshang”), an entity in which our chief executive officer, Mr. Gang Lai, owned 5% of its equity interests as of the date of that agreement. Pursuant to this purchase agreement, Jiangxi Yueshang will sell and we will purchase certain residential apartments and commercial office space totaling 2,749.30 square meters, with a total purchase price of RMB32 million (approximately $4.6 million). Pursuant to this purchase agreement, we were required to make a prepayment in the amount of 50% of the total purchase price, with 20% of the total purchase price payable when a certificate of occupancy is available to us, and 30% of the total purchase price payable upon delivery of the property. As of March 31, 2023, we had made a prepayment of RMB16 million (approximately $2.3 million) to Jiangxi Yueshang. The remaining balance is expected to be paid by August 2024.
As of March 31, 2023, we also had short-term bank loans of approximately $4.1 million that we obtained from Jiangxi Luling Rural Commercial Bank (“LRC Bank”) and Bank of Communications for working capital purposes. We expect that we will be able to renew all of the existing bank loans upon their maturity based on our past experiences and our outstanding credit history.
As of March 31, 2023, our working capital balance was $29.3 million. In assessing our liquidity, management monitors and analyzes our cash on-hand, our ability to generate sufficient revenue in the future, and our operating and capital expenditure commitments. We believe that our current cash and cash flows provided by operating activities, borrowings from banks and from our principal shareholders will be sufficient to meet our working capital needs in the next 12 months from the date our unaudited condensed consolidated financial statements for the six months ended March 31, 2023 are released.
The following table sets forth summary of our cash flows for the periods indicated:
| | | For the Six Months Ended
March 31, | |
| | | 2023 | | | 2022 | |
| Net cash provided by operating activities | | $ | 4,798,702 | | | $ | 6,118,203 | |
| Net cash used in investing activities | | | (646 | ) | | | (55,091 | ) |
| Net cash provided by (used in) financing activities | | | 2,080,918 | | | | (19,991 | ) |
| Effect of exchange rate change on cash and restricted cash | | | 364,084 | | | | 115,271 | |
| Net increase in cash | | | 7,243,058 | | | | 6,158,392 | |
| Cash, beginning of period | | | 5,711,458 | | | | 8,077,908 | |
| Cash, end of period | | $ | 12,954,516 | | | $ | 14,236,300 | |
Operating Activities
Net cash provided by operating activities was $4,798,702 for the six months ended March 31, 2023, primarily consisted of the following:
| ● | Net loss of $715,427 for the period. |
| ● | An increase in accounts payable of $7,928,308 due to pending invoices from suppliers for raw materials purchased in the first quarter of 2023. |
| ● | An increase in accounts receivable of $1,763,903. Our accounts receivable primarily includes balance due from customers for our pharmaceutical products sold and delivered to customers. As of date of this report, approximately 77.6%, or $14.2 million of our net accounts receivable balance as of March 31, 2023 has been subsequently collected. Collected accounts receivable will be used as working capital in our operations, if necessary. |
| ● | A decrease in deferred income tax benefit of $556,867 as we utilized deferred tax asset in the six months ended March 31, 2023. |
| ● | An increase in inventory balance of $488,746 because we increased inventory stockpiles to reduce the negative impact from increased market price of Chinese traditional medicine raw materials. |
| ● | A decrease in accrued expenses and other current liabilities of $465,431 due to payments made to our advertising service provider in the six months ended March 31, 2023. |
Net cash provided by operating activities was $6,118,203 for the six months ended March 31, 2022, primarily consisted of the following:
| ● | Net income of $1,731,735 for the period. |
| ● | An increase in accounts receivable of $3,060,116. Our accounts receivable primarily includes balance due from customers for our pharmaceutical products sold and delivered to customers. As of date of this report, all of our net accounts receivable balance as of March 31, 2022 have been subsequently collected. Collected accounts receivable will be used as working capital in our operations, if necessary. |
| ● | An increase in inventory balance of $860,517 because we increased the purchase of our raw material inventories and increased the purchase of finished goods inventory from third-party pharmaceutical companies in anticipation of increased sales in the coming months. |
| ● | A decrease in advance to suppliers of $2,664,149 because we made significant advance payments to suppliers for raw material purchase as of last fiscal year end and we received approximately $2.7 million purchased raw materials during the six months ended March 31, 2022. |
| ● | A decrease in prepayment for advertising of $7,593,960. In September 2021, we engaged a third-party advertising agency to develop and produce TV advertisement for promoting the sales of our major TCMD product, Bai Nian Dan and Guben Yanling Pill, and coordinate with a TV channel to broadcast the advertisement to targeted geographic market areas. Such prepayment has been charged to expense when our TV advertisement was first broadcasted in October 2021. |
| ● | A decrease in accounts payable of $1,751,013 because we made payment to raw material suppliers when we received the invoices from them. |
Investing Activities
Net cash used in investing activities amounted to $646 for the six months ended March 31, 2023 due to purchase of fixed assets.
Net cash used in investing activities amounted to $55,091 for the six months ended March 31, 2022, which primarily included the purchase of fixed assets of $55,629, offset by proceeds of $538 from disposal of certain equipment.
Financing Activities
Net cash provided by financing activities amounted to $2,080,918 for the six months ended March 31, 2023, primarily include the following:
| ● | Proceeds from short-term bank loans of $1,146,776 and repayment of bank loans of $1,146,776. |
| ● | Proceeds from related party borrowings of $2,080,918. The balance due to related party mainly consisted of advances from our principal shareholders for working capital purposes during our normal course of business. These advances were non-interest bearing and due on demand. |
Net cash used in financing activities amounted to $19,991 for the six months ended March 31, 2022, primarily include the following:
| ● | Proceeds from short-term bank loans of $1,255,200 and repayment of bank loans of $1,255,200. |
| ● | Repayment of related party borrowings of $19,991. The balance due to related party mainly consisted of advances from our principal shareholders for working capital purposes during our normal course of business. These advances were non-interest bearing and due on demand. |
Commitments and contingencies
From time to time, we are a party to various legal actions arising in the ordinary course of business. We accrue costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. For the six months ended March 31, 2023 and 2022, we did not have any material legal claims or litigation that, individually or in aggregate, could have a material adverse impact on our consolidated financial position, results of operations and cash flows.
As of March 31, 2023, we had the following contractual obligations:
| | | Payments Due by Period | |
| Contractual Obligations | | Total | | | Less than
1 year | | | 1-2 years | | | 2-3 years | |
| (1) Debt Obligations | | $ | 4,077,108 | | | $ | 4,077,108 | | | $ | | | | $ | - | |
| (2) Capital expenditure commitment on CIP project | | | 13,949,534 | | | | 3,603,872 | | | | 9,144,371 | | | | 1,201,291 | |
| (3) Capital expenditure commitment for purchase of property | | | 2,329,776 | | | | - | | | | 2,329,776 | | | | - | |
| Total | | $ | 20,356,418 | | | $ | 7,680,980 | | | $ | 11,474,147 | | | $ | 1,201,291 | |
| (1) | As of March 31, 2023, we had total $4,077,108 short-term borrowings from LRC Bank and Bank of Communications (see Footnote 12 of our unaudited consolidated financial statements and footnotes, Short-term bank loans, for details). |
| (2) | On June 25, 2021, we signed a construction sub-contract with Chenyuan, pursuant to which, Chenyuan will help us construct four manufacturing plant buildings and an office building with a total estimated budget of RMB165 million (approximately $24.0 million). As of March 31, 2023, we had made a prepayment of approximately RMB69.2 million (approximately $10.1 million) to Chenyuan and future additional capital expenditure on this CIP project was estimated to be approximately RMB95.8 million (equivalent to $13.9 million) (see Footnote 10 of our unaudited consolidated financial statements and footnotes, Prepayment for CIP project, for details). |
| (3) | On May 6, 2021, we entered into a real estate property purchase agreement with a related party, Jiangxi Yueshang, an entity in which our chief executive officer, Mr. Gang Lai, owned 5% of its equity interests as of the date of that agreement. Pursuant to this purchase agreement, Jiangxi Yueshang will sell and we will purchase certain residential apartments and commercial office space totaling 2,749.30 square meters, with a total purchase price of RMB32 million (approximately $4.6 million). Pursuant to this purchase agreement, we were required to make a prepayment in the amount of 50% of the total purchase price, with 20% of the total purchase price payable when a certificate of occupancy is available to us, and 30% of the total purchase price payable upon delivery of the property. As of March 31, 2023, we had made a prepayment of RMB16 million (approximately $2.3 million) to Jiangxi Yueshang. The remaining balance is expected to be paid by August 2024 (see Footnote 11 of our unaudited consolidated financial statements and footnotes, Prepayment for purchase of a property, for details). |
Trend Information
Other than as disclosed elsewhere in this report, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of March 31, 2023 and September 30, 2022.
Inflation
Inflation does not materially affect our business or the results of our operations.
Seasonality
Seasonality does not materially affect our business or the results of our operations.
