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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 consolidated financial statements and related notes
that appear in this report. 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 this report, particularly
We are 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.
We have been profitable since 2015 and we believe
we are well-positioned to benefit from the rapid growth of the TCMD market in China and to leverage the leading market position of our
flagship products in order to further grow our business.
Completion of the Initial Public Offering ("IPO")
On March 25, 2021, we closed our IPO of 5,000,000
ordinary shares, par value $0.003125 per share (the "ordinary shares") at a public offering price of $5.00 per share. On March
29, 2021, the underwriter exercised in full its over-allotment option to purchase an additional 750,000 ordinary shares. The
closing for the sale of the over-allotment shares took place on March 31, 2021. Gross proceeds of our IPO, including the proceeds from
the sale of the over-allotment shares, totaled $28.75 million, before deducting underwriting discounts and other related expenses.
Net proceeds of our IPO, including over-allotment shares, were approximately $25.6 million. In connection with the IPO, our ordinary shares
began trading on the Nasdaq Global Market under the symbol "UPC" on March 23, 2021. Out of the $25.6 million net IPO
proceeds, we received approximately $22.0 million by March 31, 2021. We received the rest net proceeds of $3.6 million in connection with
the sale of the over-allotment shares on April 1, 2021. As a result, our unaudited condensed balance sheet as of March 31, 2021 reported
a subscription receivable of $3,571,241.
Newly Established Subsidiary
On May 12, 2021, through our PRC subsidiary Jiangxi
Universe Pharmaceuticals Co., Ltd. ("Jiangxi Universe"), we 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 our product offerings in the near future. As of the date of this
filing, Universe Hanhe has no active business operations.
Our business operations has been affected and
may continue to be affected by the ongoing COVID-19 pandemic. Although we resumed our operations since early March 2020 and the impact
of COVID-19 on our operating results and financial performance for fiscal year 2020 and for the six months ended March 31, 2021 were temporary,
a resurgence could negatively affect the execution of customer contracts, the collection of customer payments, or disrupt our supply chain,
and the continued uncertainties associated with COVID 19 may cause our revenue and cash flows to underperform in the next 12 months. The
extent of the future impact of the COVID-19 pandemic on our business and results of operations is still uncertain.
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.
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 changes in the number of customers, sales volume, selling price, and mix of products sold.
| For the Six Months Ended March 31, | Variance | |||||||||||
| 2021 | 2020 | % | ||||||||||
| Revenue from sales of self-manufactured TCMD products | 54.8 | % | 45.4 | % | 9.4 | % | ||||||
| Revenue from sales of third-party products | 45.2 | % | 54.6 | % | (9.4 | )% | ||||||
| Total revenue | 100.0 | % | 100.0 | % | ||||||||
| Number of customers | 1,092 | 1,162 | (6.0 | )% | ||||||||
| Sales volume by unit- TCMD products | 9,140,000 | 5,760,229 | 58.7 | % | ||||||||
| Sales volume by unit- third party products | 5,043,984 | 5,219,039 | (3.4 | )% | ||||||||
| Total sales volume | 14,183,984 | 10,979,268 | 29.2 | % | ||||||||
| Average selling price per unit- TCMD products | $ | 1.46 | $ | 1.29 | 12.8 | % | ||||||
| Average selling price per unit- Third-party products | $ | 2.18 | $ | 1.71 | 26.9 | % |
Revenues from sales of TCMD products manufactured
by us accounted for 54.8% and 45.4% of our total revenues for the six months ended March 31, 2021 and 2020, 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 ("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.
Sales volume of our TCMD products increased by
3,379,771 units, or 58.7%, from 5,760,229 units sold in six months ended March 31, 2020 to 9,140,000 units sold in six months ended March
31,2021. The increase in our sales volume was because we were unable to timely fulfill the orders of our customer in February and March
2020, and accordingly our sales volume was negatively impacted in six months ended March 31, 2020 and lower than that of the six months
ended March 31, 2021. We resumed our business operations since early March 2020 and the COVID-19 adverse impact on our business operations
appears to be temporary since April 2020 up to the date of this report. Among the increase in total sales volume of 3,379,771 units from
the six months ended March 31, 2020 to the six months ended March 31, 2021, 88% of such increase was related to increased sales volume
of our cold and flu medications and our key TCMD product, Guben Yanling Pill. As affected by the inflation and increased costs of raw
materials, we adjusted our selling price of TCMD products accordingly. Average selling price of our TCMD products increased by 12.8%,
from $1.29 per unit in six months ended March 31,2020 to $1.46 per unit in six months ended March 31,2021. In addition, the number of
our customers decreased by 6.0%, from 1,162 in six months ended March 31,2020 to 1,092 in six months ended March 31,2021 because we experienced
delay in shipping and delivering our products to our customers located in certain remote geographic areas as a result of transportation
restrictions related to COVID-19. On the other hand, exchange rate between RMB and US$ was US$1.00 to RMB 7.0126 in six months ended March
31,2020 as compared to US$1.00 to RMB 6.5531 in six months ended March 31, 2021. The depreciation of RMB against US$ had a 6.6% positive
impact on our reported total revenues. These combined factors led to a 79.0% increase in our revenue from sales of our TCMD products from
six months ended March 31,2020 to six months ended March 31,2021.
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.
Revenues from sales of third-party products accounted
for 45.2% and 54.6% of our total revenues for the six months ended March 31, 2021 and 2020, respectively. Sales volume of third-party
products decreased by 175,055 units or 3.4%, from 5,219,039 units sold in six months ended March 31, 2020 to 5,043,984 units sold in six
months ended March 31, 2021, while the average selling price of third-party products increased by 26.9% from $1.71 per unit in six months
ended March 31, 2020 to $2.18 per unit in six months ended March 31,2021 as affected by increased purchase costs of third-party products
as affected by (i) general inflation, (ii) increased raw material costs, and (iii) changes in product mix based on customer orders. On
the other hand, exchange rate between RMB and US$ was US$1.00 to RMB 7.0126 in six months ended March 31, 2020 as compared to US$1.00
to RMB 6.5531 in six months ended March 31, 2021. The depreciation of RMB against US$ had a 6.6% positive impact on our reported total
revenues. These factors led to a 22.6% increase in our revenue from sales of our third-party products from six months ended March 31,
2020 to in six months ended March 31, 2021. As of the date of this filing, the COVID-19 pandemic in China appears to have slowed down
and most provinces and cities have resumed business activities under the guidance and support of the government. We had been focusing
on manufacturing and selling our own TCMD products during the six months ended March 31, 2021. For future third-party product sales, our
strategy is to select and distribute certain high-quality products with higher margin. We do not expect that the sales of third party
products will outpace the sales of our own TCMD products going forward.
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