CPHI 10-Q
China Pharma Holdings, Inc. (CPHI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from ____________ to ____________
Commission File Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) |
| | | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
| Large accelerated filer ☐ | Accelerated filer ☐ |
|
| Smaller reporting company Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 10, 2022, there were
CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
1
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Banker’s acceptances | ||||||||
| Trade accounts receivable, less allowance for doubtful accounts of $ | ||||||||
| Other receivables, less allowance for doubtful accounts of $ | ||||||||
| Advances to suppliers | ||||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Total Current Assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right of use asset | ||||||||
| Intangible assets, net | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Other payables | ||||||||
| Advances from customers | ||||||||
| Borrowings from related parties | ||||||||
| Operating lease liability | ||||||||
| Lines of credit | ||||||||
| Total Current Liabilities | ||||||||
| Non-current Liabilities: | ||||||||
| Convertible, redeemable note payable | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Deferred tax liability | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 9) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Retained deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total Stockholders’ Equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ( | ) | ( | ) | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| Bad debt (benefit) expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | - | - | ||||||||||||||
| Net (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive income (loss) - foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive (loss) income | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| (Loss) Earnings per share: | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Weighted average shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2021 | ( | ) | ||||||||||||||||||||||
| Net loss for the period | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Conversions of Note Payable to common stock | - | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ||||||||||||||||||||||
| Conversions of Note Payable to common stock | ||||||||||||||||||||||||
| Net loss for the period | ( | ) | ( | ) | ||||||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months | ||||||||
| Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Depreciation and amortization | ||||||||
| Bad debt (benefit) expense | ( | ) | ( | ) | ||||
| Inventory write off | ||||||||
| Changes in assets and liabilities: | ||||||||
| Trade accounts and other receivables | ( | ) | ||||||
| Advances to suppliers | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Trade accounts payable | ( | ) | ( | ) | ||||
| Other payables and accrued expenses | ( | ) | ||||||
| Advances from customers | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ||||||
| Net Cash (Used in) Provided by Operating Activities | ( | ) | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Payments of construction term loan | ( | ) | ||||||
| Payments of line of credit | ( | ) | ( | ) | ||||
| Proceeds from line of credit | ||||||||
| Borrowings and interest from related party | ||||||||
| Repayments to related party | ( | ) | ( | ) | ||||
| Net Cash (Used In) Provided By Financing Activities | ( | ) | ||||||
| Effect of Exchange Rate Changes on Cash | ( | ) | ||||||
| Net Change in Cash and Cash Equivalents | ( | ) | ||||||
| Cash and Cash Equivalents at Beginning of Period | ||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental Noncash Investing and Financing Activities: | ||||||||
| Accounts receivable collected with banker’s acceptances | $ | $ | ||||||
| Inventory purchased with banker’s acceptances | ||||||||
| Conversions of Note Payable to common stock | ||||||||
| Right of use assets obtained in exchange for operatng lease obligations | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations – China
Pharma Holdings, Inc., a Nevada corporation (the “Company”), owns
Onny acquired
Helpson is principally engaged in the development, manufacture and marketing of pharmaceutical products for human use in connection with a variety of high-incidence and high-mortality diseases and medical conditions prevalent in the PRC. All of its operations are conducted in the PRC, where its manufacturing facilities are located. Helpson manufactures pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions. The majority of its pharmaceutical products are sold on a prescription basis and all have been approved for at least one or more therapeutic indications by the National Medical Products Administration (the “NMPA”, formerly China Food and Drug Administration, or CFDA) based upon demonstrated safety and efficacy.
Liquidity and Going Concern
As of June 30, 2022, the Company had cash and
cash equivalents of $
Pursuant to the requirements of Accounting Standards Codification (ASC) 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
Under ASC 205-40, the strategic alternatives being pursued by the Company cannot be considered probable at this time because none of the Company’s current plans have been finalized at the time of the issuance of these financial statements and the implementation of any such plan is not probable of being effectively implemented as none of the plans are entirely within the Company’s control. Accordingly, substantial doubt is deemed to exist about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.
6
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
Consolidation and Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are expressed in United States dollars. The accompanying consolidated financial statements include the accounts and operations of the Company including its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation.
Helpson’s functional currency is the Chinese Renminbi. Helpson’s revenue and expenses are translated into United States dollars at the average exchange rate for the period. Assets and liabilities are translated at the exchange rate as of the end of the reporting period. Gains or losses from translating Helpson’s financial statements are included in accumulated other comprehensive income, which is a component of stockholders’ equity. Gains and losses arising from transactions denominated in a currency other than the functional currency of the entity that is party to the transaction are included in the results of operations.
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated on consolidation. However, the results of operations included in such financial statements may not necessary be indicative of annual results. Such financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2022 (“2021 Annual Report”).
Accounting Estimates - The methodology used to prepare the Company’s financial statements is in conformity with U.S. GAAP, which requires the management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Therefore, actual results could differ from those estimates.
The Company uses the same accounting policies in preparing its quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
Loss Per Share - Basic loss per share is calculated by dividing loss available to common stockholders by the weighted-average number of shares of common stock outstanding, excluding unvested stock. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential common shares, including unvested stock, had been issued and if the additional common shares were dilutive.
The potentially dilutive
common shares related to the Convertible, redeemable note payable of
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The pronouncement will be effective for public business entities that are SEC smaller reporting company filers in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not anticipate the guidance will have a material impact on its financial statements.
7
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
In 2020, the Financial Accounting Standards Board issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to address the complexity in accounting for certain financial instruments with characteristics of liabilities and equity. Amongst other provisions, the amendments in this ASU significantly change the guidance on the issuer’s accounting for convertible instruments and the guidance on the derivative scope exception for contracts in an entity’s own equity such that fewer conversion features will require separate recognition, and fewer freestanding instruments, like warrants, will require liability treatment. The pronouncement will be effective for public business entities that are SEC smaller reporting company filers in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted the standard during fiscal 2021.
From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of ASUs. Unless otherwise discussed, the Company believes that the recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on its consolidated financial statements upon adoption.
NOTE 2 – INVENTORY
Inventory consisted of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | ||||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total Inventory | $ | $ | ||||||
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Permit of land use | $ | $ | ||||||
| Building | ||||||||
| Plant, machinery and equipment | ||||||||
| Motor vehicle | ||||||||
| Office equipment | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:
| Asset | Life - years | |
| Permit of land use | ||
| Building | ||
| Plant, machinery and equipment | ||
| Motor vehicle | ||
| Office equipment |
Depreciation relating to office equipment was
included in general and administrative expenses, while all other depreciation was included in cost of revenue. Depreciation expense was
$
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the cost of medical formulas approved for production by the NMPA. The Company did not obtain NMPA production approval for any new medical formulas during the six months ended June 30, 2022 and 2021 and no costs were reclassified from advances to intangible assets during the six months ended June 30, 2022 and 2021, respectively.
8
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
The Company evaluates each approved medical formula for impairment at the date of NMPA approval, when indications of impairment are present and also at the date of each financial statement. The Company’s evaluation is based on an estimated undiscounted net cash flow model, which considers currently available market data for the related drug and the Company’s estimated market share. If the carrying value of the medical formula exceeds the estimated future net cash flows, an impairment loss is recognized for the excess of the carrying value over the fair value of the medical formula, which is determined by the estimated discounted future net cash flows. No impairment loss was recognized during the six months ended June 30, 2022 and 2021.
Intangible assets consisted solely of NMPA approved medical formulas as follows:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Gross carrying amount | $ | $ | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Net carrying amount | $ | $ | ||||||
NOTE 5 – OTHER PAYABLES
Other Payables consisted of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Compensation payable to officer | $ | $ | ||||||
| Compensation and interest to related parties | ||||||||
| Business taxes and other | ||||||||
| Total Other Payables | $ | $ | ||||||
NOTE 6 – RELATED PARTY TRANSACTIONS
A member of the Company’s board of directors
(“Board”) had previously advanced to the Company an aggregate amount of $
The Company repaid $
9
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
NOTE 7 –LINES OF CREDIT
In April 2020,
On June 30, 2020
Principal payments required for the remaining terms of the loan facility and lines of credit as of June 30, 2022 are as follows:
| Year | Lines of Credit | |||
| 2022 | $ | |||
| $ | ||||
Fair Value of Lines of Credit – Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the carrying amounts of the lines of credit outstanding as of June 30, 2022 and December 31, 2021 approximated their fair values because the underlying instruments bear an interest rate that approximates current market rates.
NOTE 8 – CONVERTIBLE NOTE PAYABLE
On November
17, 2021, the Company entered into a Securities Purchase Agreement (the “Agreement”) pursuant to which the Company issued
an unsecured convertible promissory note (the “Note”) to an institutional accredited investor Streeterville Capital, LLC (the
“Investor”). The Note matures
10
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
The Note
balance of $
Interest accrues on the outstanding balance of the Note at 5% per annum compounded daily. Upon the occurrence of an Event of Default as defined in the Note, interest accrues at the lesser of 22% per annum or the maximum rate permitted by applicable law. In addition, upon any Event of Default, the Investor may accelerate the outstanding balance payable under the Note, which will increase automatically upon such acceleration by 15% or 5%, depending on the nature of the Event of Default.
Pursuant to the terms of the Agreement and the Note, the Company must obtain Investor’s consent for certain fundamental transactions such as consolidation, merger with or into another entity (excerpt for a reincorporation merger), disposition of substantial assets, change of control, reorganization or recapitalization. Any occurrence of a fundamental transaction without Investor’s prior written consent will be deemed an Event of Default.
Investor
may redeem all or any part the outstanding balance of the Note, subject to $
Total interest
expense for the three months ended June 30, 2022 and 2021 was $
On March
21, 2022 the Investor delivered its notice of redemption for $
On March
30, 2022 the Investor delivered its notice of redemption for $
On June
9, 2022 the Investor delivered its notice of redemption for $
NOTE 9 - LEASES
The Company has leases for certain office and
production facilities in the PRC which are classified as operating leases. The leases contain payment terms for fixed amounts. Options
to extend are recognized as part of the lease liabilities and recognized as right to use assets when management estimates to renew the
lease. There are no residual value guarantees, no variable lease payments, and no restrictions or covenants imposed by leases. The discount
rate used in measuring the lease liabilities and right of use assets was determined by reviewing the Company’s incremental borrowing
rate at the initial measurement date. For the three months ended June 30, 2022 and 2021, operating
lease cost was $
11
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
Minimum lease payments for the Company’s operating lease liabilities were as follows for the twelve month periods ended June 30:
| 2023 | $ | |||
| Total undiscounted cash flows | ||||
| Less: Imputed interest | ( | ) | ||
| Less: Operating lease liabilities, current portion | ( | ) | ||
| Operating lease liabilities, net of current portion | $ |
The Company has leases with terms less than
NOTE 10 - INCOME TAXES
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
Liabilities are established for uncertain tax positions expected to be taken in income tax returns when such positions are judged to meet the “more-likely-than-not” threshold based on the technical merits of the positions. Estimated interest and penalties related to uncertain tax positions are included as a component of other expenses. Through December 31, 2021, the Company has not identified any uncertain tax positions that it has taken. U.S. income tax returns for the years ended December 31, 2017 through December 31, 2021 and the Chinese income tax return for the year ended December 31, 2021 are open for possible examination.
Under the current tax law in the PRC, the Company is and will be subject
to the enterprise income tax rate of
There was no provision for income taxes for the three and six months ended June 30, 2022 and 2021, respectively due to continued net losses of the Company.
As of June 30, 2022, the Company had net operating
loss carryforwards for PRC tax purposes of approximately $
U.S. federal tax legislation, commonly referred
to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017.
In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
differences become deductible or tax loss carry forwards are utilized. Management considers projected future taxable income
and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and
projections for future taxable income over the periods on which the deferred tax assets are deductible or can be utilized, management
believes it is not likely for the Company to realize all benefits of the deferred tax assets as of June 30, 2022 and December 31, 2021. Therefore,
the Company provided for a valuation allowance against its deferred tax assets of $
The Company also incurred various other taxes, comprised primarily of business taxes, value-added taxes, urban construction taxes, education surcharges and others. Any unpaid amounts are reflected on the balance sheets as accrued taxes payable.
12
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
NOTE 11 – FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, a hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; and Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The Company uses fair value to measure the value of the banker’s acceptance notes it holds at June 30, 2022 and December 31, 2021. The banker’s acceptance notes are recorded at cost which approximates fair value. The Company held the following assets and liabilities recorded at fair value:
| Fair Value Measurements at | ||||||||||||||||
| Reporting Date Using | ||||||||||||||||
| Description | June 30, 2022 | Level 1 | Level 2 | Level 3 | ||||||||||||
| Banker’s acceptance notes | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Fair Value Measurements at | ||||||||||||||||
| Reporting Date Using | ||||||||||||||||
| Description | December 31, 2021 | Level 1 | Level 2 | Level 3 | ||||||||||||
| Banker’s acceptance notes | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
NOTE 12 - STOCKHOLDERS’ EQUITY
The Company is authorized to issue
According to relevant PRC laws, companies registered
in the PRC, including the Company’s PRC subsidiary, Helpson, are required to allocate at least
2022 Share Issuances
On March
21, 2022 the Investor as discussed in Note 8 delivered its notice of redemption for $
On March
30, 2022 the Investor as discussed in Note 8 delivered its notice of redemption for $
On June
9, 2022 the Investor as discussed in Note 8 delivered its notice of redemption for $
13
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
2010 Incentive Plan
On November
12, 2010, the Company’s Board adopted the Company’s 2010 Incentive Plan (the “Plan”), which was then approved
by stockholders on December 22, 2010. On October 17, 2019, the Board of Directors approved the First Amendment to the 2010 Incentive Plan
(the “Amendment”), pursuant to which the term of the 2010 Incentive Plan was extended to December 31, 2029. The Amendment
was adopted by the stockholders on December 19, 2019. On October 25, 2021, the Board of Directors approved, and on December 27, 2021 our
stockholders adopted the Amendment No.2 to the Plan to increase the number of shares of the Common Stock, that are reserved thereunder
by
As of June 30, 2022, there was no remaining unrecognized compensation expense related to stock options or restricted stock grants.
NOTE 13 – RISKS & UNCERTAINTIES
Current vulnerability due to certain concentrations
For the six months ended June 30, 2022, one customer
accounted for
For the six months ended June 30, 2021, no customer
accounted for more than
Nature of Operations
Impact from the New Coronavirus Global Pandemic (“COVID-19”) - Although the outbreak of COVID-19 since the first quarter of 2020 has been under control, and China has returned to normal production and social life in an orderly manner, China is still encountering frequent resurgences in many of the major cities. For now, these resurgences have not caused material impact to our daily operations, However, due to the lock down and zero-case policy, we cannot ensure that any future resurgence will not cause substantial influence onto our business. If that happens, any disruption or delay of the Company’s suppliers or customers in the future would likely impact its sales and operating results.
Economic environment - Substantially all of the Company’s operations are conducted in the PRC, and therefore the Company is subject to special considerations and significant risks not typically associated with companies operating in the United States of America. These risks include, among others, the political, economic and legal environments and fluctuations in the foreign currency exchange rate. The Company’s results from operations may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The unfavorable changes in global macroeconomic factors may also adversely affect the Company’s operations.
In addition, all of the Company’s revenue is denominated in the PRC’s currency of Renminbi (RMB), which must be converted into other currencies before remittance out of the PRC. Both the conversion of RMB into foreign currencies and the remittance of foreign currencies abroad require approval of the PRC government.
NOTE 14 – SUBSEQUENT EVENTS
On August 3, 2022 the
Investor discussed in Note 8 delivered its notice of redemption for $
14
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “could,” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the readers that any such forward-looking statements contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors, some of which are described in this report and some of which are discussed in our other filings with the Securities and Exchange Commission (the “SEC”). These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward-looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.
Business Overview & Recent Developments
We are principally engaged in the development, manufacture and marketing of pharmaceutical products for human use in connection with a variety of high-incidence and high-mortality diseases and medical conditions prevalent in the People’s Republic of China (the “PRC”). All of our operations are conducted in the PRC, where our manufacturing facilities are located. We manufacture pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions. The majority of our pharmaceutical products are sold on a prescription basis and all of them have been approved for at least one or more therapeutic indications by the National Medical Products Administration (the “NMPA”, formerly China Food and Drug Administration, or CFDA) based upon demonstrated safety and efficacy.
China’s consistency evaluation of generic drugs continues to proceed in the first six months ended June 30, 2022. The supporting policies from central and provincial governments are constantly issued, including polices regarding consistency evaluation for injectable products. We have always taken the task of promoting the consistency evaluation as our top priority, and worked on them actively. However, due to the continuous dynamic changes of the detailed policies, future market, expected investment, and return of investment (“ROI”) for each drug’s consistency evaluation, entities in the whole industry, including us, have been making slow progresses in terms of the consistency evaluation. We have a product that passed biological equivalents experiments of consistency evaluation in March 2021. We have submitted application documents to NMPA at the end of 2021, and we passed the clinical verification of the drug by NMPA in June 2022.
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We have taken a more cautious and flexible attitude towards initiating and progressing any project for existing products’ consistency evaluation to cope with the changing macro environment of drug sales in China. Since “4 + 7” (refers to 11 selected pilot cities, including 4 municipalities and 7 other cities) trial Centralized Procurement (“CP”) activities initiated in 2018, seven rounds of CP activities have been carried out by July 2022, which significantly reduced the price of the drugs that won the bids. In addition, the consistency evaluation has been adopted as one of the qualification standards for participating in the CP activities. As a result, we need to balance at least the two factors above (namely, the investment of financial resources and time to obtain the qualification of CP, and the sharp decline in the price of drugs included in CP) before making decisions for any products.
In addition, we continue to explore the field of comprehensive healthcare. Comprehensive healthcare is a general concept proposed according to the development of the times, social needs and changes in disease spectrum. According to the Outline of “Healthy China 2030” issued by Chinese government in October 2016, the total size of China’s health service industry will reach RMB 16 trillion (approximately 2.5 trillion) by 2030. This industry focuses on people’s daily life, aging and disease, pays attention to all kinds of risk factors and misunderstandings affecting health, calls for self-health management, and advocates the comprehensive care throughout the entire process of life. It covers all kinds of health-related information, products and services, as well as actions taken by various organizations to meet the health needs. We launched Noni enzyme, a natural, Xeronine-rich antioxidant food supplement at the end of 2018. We also launched wash-free sanitizers and masks in 2020 to address the market needs caused by COVID-19 in China. With the impact of COVID-19 continuing, masks and sanitizers have become long-time anti-epidemic materials. We have sufficient production capacity for medical masks, surgical masks and KN95 masks, which meets the personal needs for protection against the epidemic outbreak.
We will continue to optimize our product structure and actively respond to the current health needs of human beings.
Market Trends
As a generic drug company, we are presented with a huge domestic market. We believe that through further upgrades and better conformity with Chinese consistency evaluations based on European and American production standards, we will be able to export our products to overseas markets. In China’s market, we believe that in the future, cost management and control ability will gradually become an important factor in determining the competitiveness of generic pharmaceutical enterprises. Although price control leads to a decline in the profitability, the CP’s winning enterprise has a good chance of achieving price-for-volume to increase its market share and support its continuous innovation transformation. On a separate note, consumption upgrading in China drives the increase of optional consumption. With the improvement of residents’ quality of life, the healthcare demand is also changing. We believe that there is a large number of unmet demands in comprehensive healthcare and Internet healthcare sectors.
In addition, the Office of the State Council issued “Pilot Plan for Marketing Authorization Holders” on May 24, 2016, allowing eligible drug research and development institutions and scientific researchers to become Marketing Authorization Holders (“MAH”) by obtaining drug marketing authorization and drug approval numbers from the State Council. This policy uses a management model of separating drug marketing authorization and drug production licenses, thereby allowing an MAH to produce pharmaceuticals themselves or to consign production to other pharmaceutical manufacturers. This policy not only transits China’s production practices to meet the European and United States standards by separating drug approval and production qualifications, thereby changing the existing model of bundling drug approval numbers to pharmaceutical manufacturers in China, but also serves as a supplement to the ongoing consistency evaluations policy.
In general, demand for pharmaceutical products is still experiencing steady growth in China. We believe the ongoing generic drug consistency evaluations and reform of China’s drug production registration and review policies will have major effects on the future development of our industry and may change its business patterns. We will continue to actively adapt to the national policy guidance and further evaluate market conditions for our existing products, then adjust and compete in the market in order to optimize our development strategy.
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Results of Operations for the three months ended June 30, 2022
Revenue
Revenue decreased by 33.2% to $1.6 million for the three months ended June 30, 2022, as compared to $2.4 million for the three months ended June 30, 2021. This decrease was mainly due to the decline in the sales price of our main products caused by the promotion of China’s drug Centralized Procurement policy, as well as the negative impact on drug sales triggered by quarantine, lagged logistics and transportation, and drug-sales-control polices caused by the scattered outbreak COVID-19 in the second quarter of 2022 in China.
Set forth below are our revenues by product category in millions (USD) for the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | |||||||||||||
| Product Category | 2022 | 2021 | Net Change | % Change | |||||||||
| CNS Cerebral & Cardio Vascular | 0.55 | 0.89 | -0.34 | -38 | % | ||||||||
| Anti-Viral/ Infection & Respiratory | 0.69 | 1.10 | -0.41 | -37 | % | ||||||||
| Digestive Diseases | 0.11 | 0.09 | 0.02 | 22 | % | ||||||||
| Others | 0.27 | 0.33 | -0.06 | -18 | % | ||||||||
The most significant revenue decrease in terms of dollar amount was in our “Anti-Viral/ Infection & Respiratory” product category, which generated $0.69 million in sales revenue in the three months ended June 30, 2022 compared to $1.10 million for the same period a year ago, which is a decrease of $0.41 million. This decrease was mainly due to the decrease in sales of Cefaclor Dispersible Tablet, which was caused by the price and sales volume pressure from Centralized Procurement on this products.
Sales in “CNS Cerebral & Cardio Vascular” product category generated $0.55 million in sales revenue in the three months ended June 30, 2022 compared to $0.89 million for the same period a year ago, which is a decrease of $0.34 million. This decrease was mainly due to the decrease in sales of Alginic Sodium Diester Injection, which was caused by market volatility.
Our “Others” product category generated $0.27 million in sales revenue in the three months ended June 30, 2022, compared to $0.33 million in the same period in 2021. This decrease was mainly due to the decrease in sales of Vitamin B6 for injection, which was caused by market volatility.
Our “Digestive Diseases” product category sales was $0.11 million in the three months ended June 30, 2022, as compared to $0.09 million for the same period in 2021, the increase was mainly due to the increase in sales of Tiopronin that was caused by market volatility.
| Three Months Ended June 30, | ||||||||
| Product Category | 2022 | 2021 | ||||||
| CNS Cerebral & Cardio Vascular | 34 | % | 37 | % | ||||
| Anti-Viral/ Infection & Respiratory | 43 | % | 45 | % | ||||
| Digestive Diseases | 7 | % | 4 | % | ||||
| Others | 16 | % | 14 | % | ||||
For the three months ended June 30, 2022, revenue breakdown by product category showed certain changes to that of the same period in 2021. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 43% and 45% of total sales in the three months ended June 30, 2022 and 2021, respectively. The “CNS Cerebral & Cardio Vascular” product category represented 34% and 37% of total revenue in the three months ended June 30, 2022 and 2021, respectively. The “Others” product category represented 16% and 14% of revenues in the three months ended June 30, 2022 and 2021, respectively. The “Digestive Diseases” product category represented 7% and 4% of total revenue in the three months ended June 30, 2022 and 2021, respectively.
17
Cost of Revenue
For the three months ended June 30, 2022, our cost of revenue was $1.8 million, or 114.2% of total revenue, while cost of revenue was $2.4 million, or 97.1% of total revenue, for the same period in 2021. The increase in the proportion of cost to revenue in this quarter was mainly due to the fact that the amount of fixed cost does not decrease with the decline of revenue.
Gross Profit (Loss) and Gross Margin
Gross loss for the three months ended June 30, 2022 was $0.23 million, as compared to a gross profit of $0.07 million during the same period in 2021. For the three months ended June 30, 2022, we had a gross loss margin of 14.2% as compared to a gross profit margin of 2.9% during the same period in 2021.
Selling Expenses
Our selling expenses for the three months ended June 30, 2022 and 2021 were $0.27 million and $0.45 million, respectively. Selling expenses accounted for 16.5% of the total revenue in the three months ended June 30, 2022, as compared to 18.4% during the same period in 2021. As a result of the adjustment of many policies of healthcare reform, we had reduced the number of personnel and expenses to efficiently support our sales and the collection of accounts receivable.
General and Administrative Expenses
Our general and administrative expenses were $0.27 million and $0.33 million for the three months ended June 30, 2022 and 2021, respectively. It accounted for 16.9% and 13.7% of our total revenues in the three months ended June 30, 2022 and 2021, respectively.
Research and Development Expenses
Our research and development expenses for the three months ended June 30, 2022 were $0.02 million, as compared to $0.05 million in the same period in 2021. Research and development expenses accounted for 0.9% and 2.2% of our total revenues in the three months ended June 30, 2022 and 2021, respectively. These expenditures were mainly for the consistency evaluations of our existing products.
Bad Debt (Benefit)
Our bad debt benefit was $4,358 for the three months ended June 30, 2022, and $4,744 for the three months ended June 30, 2021.
In general, our normal customer credit or payment terms are 180 days. This has not changed in recent years. Due to the peculiar environment affecting the Chinese pharmaceutical market, deferred payments to pharmaceutical companies by state-owned hospitals and local medicine distributors are common.
The amount of accounts receivable that was past due (or the amount of accounts receivable that was more than 180 days old) was $0.05 million and $0.11 million as of June 30, 2022 and December 31, 2021, respectively.
The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of June 30, 2022 and December 31, 2021:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 1 - 180 Days | 1.51 | % | 2.68 | % | ||||
| 180 - 360 Days | 0.29 | % | 0.17 | % | ||||
| 360 - 720 Days | 0.10 | % | 0.41 | % | ||||
| > 720 Days | 98.10 | % | 96.74 | % | ||||
| Total | 100.00 | % | 100.00 | % | ||||
Our bad debt allowance estimate practice is that we consider accounts receivable balances aged within 180 days current, except for any individual uncollectible account assessed by management. We account for the following respective percentage as bad debt allowance based on age of the accounts receivables: 10% of accounts receivable that is between 180 days and 365 days old, 70% of accounts receivable that is between 365 days and 720 days old, and 100% of accounts receivable that is greater than 720 days old.
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We recognize bad debt expenses per actual write-offs as well as changes of allowance for doubtful accounts. To the extent that our current allowance for doubtful accounts is higher than that of the previous period, we recognize a bad debt expense for the difference during the current period, and when the current allowance is lower than that of the previous period, we recognize a bad debt credit for the difference. The allowance for doubtful account balances were $17.4 million and $18.2 million as of June 30, 2022 and December 31, 2021, respectively. The changes in the allowances for doubtful accounts during the three months ended June 30, 2022 and 2021 were as follows:
| For the Three Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Balance, Beginning of Period | 18,384,642 | $ | 18,013,339 | |||||
| Bad debt expense (benefits) | (4,358 | ) | (4,744 | ) | ||||
| Foreign currency translation adjustment | (995,400 | ) | 308,395 | |||||
| Balance, End of Period | 17,384,884 | $ | 18,316,990 | |||||
Loss from Operations
Our operating loss for the three months ended June 30, 2022 was $0.78 million, compared to an operating loss of $0.75 million during the same period in 2021.
Net Interest Expense
Net interest expense for the three months ended June 30, 2022 was $0.11 million, as compared to $0.07 million for the same period in 2021.
Net Loss
Net Loss for the three months ended June 30, 2022 was $0.89 million, as compared to a net loss of $0.82 million for the same period a year ago. The increase in net loss was mainly the result of decreased revenue and increased cost in this period.
Loss per basic and diluted common share were both $0.02 for the three months ended June 30, 2022 and 2021, respectively.
The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 48,488,671 and 45,579,557 for the three months ended June 30, 2022 and 2021.
Results of operations for the six months ended June 30, 2022
Revenue
Revenue was $3.2 million and $4.8 million for the six months ended June 30, 2022 and 2021, respectively. This decrease was mainly due to the decline in the sales price of our main products caused by the promotion of China’s drug Centralized Procurement policy, as well as the negative impact on drug sales triggered by quarantine, lagged logistics and transportation, and drug-sales-control polices caused by the scattered outbreak COVID-19 in the first half of 2022 in China.
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Set forth below are our revenues by product category in millions (USD) for the six months ended June 30, 2022 and 2021, respectively:
| Six Months Ended June 30, | ||||||||||||||||
| Product Category | 2022 | 2021 | Net Change | % Change | ||||||||||||
| CNS Cerebral & Cardio Vascular | 0.84 | 1.39 | -0.55 | -40 | % | |||||||||||
| Anti-Viral/ Infection & Respiratory | 1.74 | 2.59 | -0.85 | -33 | % | |||||||||||
| Digestive Diseases | 0.17 | 0.17 | 0.00 | 2 | % | |||||||||||
| Others | 0.47 | 0.62 | -0.15 | -24 | % | |||||||||||
The most significant revenue decrease in terms of dollar amount was our “Anti-Viral/ Infection & Respiratory” product category, which generated $1.74 million in sales revenue in the six months ended June 30, 2022 compared to $2.59 million in the same period a year ago, represented a decrease of $0.85 million that was mainly caused by the decrease in sales of Cefaclor Dispersible Tablets.
Sales of our “CNS Cerebral & Cardio Vascular” was $0.84 million in sales revenue in the six months ended June 30, 2022, compared to $1.39 million in the same period a year ago, which represented a decrease of $0.55 million. This decrease was mainly due to sales decrease of Alginic Sodium Diester Injection.
Sales of “Others” product category generated $0.47 million and $0.62 million in sales revenue in the six months ended June 30, 2022 and 2021, respectively. The decrease was mainly caused by the decrease in sales of Vitamin B6.
Sales of our “Digestive Diseases” product category generated $0.17 million in each of the six months ended June 30, 2022 and 2021, respectively.
| Six Months Ended June 30, | ||||||||
| Product Category | 2022 | 2021 | ||||||
| CNS Cerebral & Cardio Vascular | 26 | % | 29 | % | ||||
| Anti-Viral/ Infection & Respiratory | 54 | % | 54 | % | ||||
| Digestive Diseases | 5 | % | 4 | % | ||||
| Other | 15 | % | 13 | % | ||||
For the six months ended June 30, 2022, revenue breakdown by product category remained similar to that of the same period in 2021. Sales of the “Anti-Viral/Infection & Respiratory” products category represented both 54% of total sales in the six months ended June 30, 2022 and 2021. The “CNS Cerebral & Cardio Vascular” category represented 26% and 29% of total revenue in the six months ended June 30, 2022 and 2021, respectively. The “Others” category represented 15% and 13% of revenues in the six months ended June 30, 2022 and 2021, respectively. And the “Digestive Diseases” category represented 5% and 4% of total revenue in the six months ended June 30, 2022 and 2021, respectively.
Cost of Revenue
For the six months ended June 30, 2022, our cost of revenue was $3.6 million, or 112.4% of total revenue, comparing to $4.4 million, or 92.8% of total revenue, in the same period in 2021. The increase in the proportion of cost to revenue in this period was mainly due to the fact that the amount of fixed cost does not decrease with the decline of revenue.
Gross Profit (Loss) and Gross Margin
Gross loss for the six months ended June 30, 2022 was $0.4 million, compared to $0.3 million in the same period in 2021. Our gross loss margin in the six months ended June 30, 2022 was 12.4% compared to a gross profit margin of 7.2% in the same period in 2021.
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Selling Expenses
Our selling expenses for the six months ended June 30, 2022 and 2021 were $0.4 million and $0.8 million, respectively. Selling expenses accounted for 13.9% of the total revenue in the six months ended June 30, 2022 compared to 17.3% in the same period in 2021.
General and Administrative Expenses
Our general and administrative expenses for the six months ended June 30, 2022 were $0.8 million, as compared to $0.7 million in the same period in 2021. Our general and administrative expenses accounted for 24.5% and 15.5% of our total revenues in the six months ended June 30, 2022 and 2021, respectively.
Research and Development Expenses
Our research and development expenses for the six months ended June 30, 2022 and 2021 were $0.07 million and $0.24 million, respectively. The decrease in research and development costs is mainly due to the fact that most of the consistency evaluation of our key product, Candesartan, was completed at the end of last year.
Bad Debt Benefit
Our bad debt benefit was $9,879 for the six months ended June 30, 2022, and $12,965 for the six months ended June 30, 2021.
The changes in the allowances for doubtful accounts during the six months ended June 30, 2022 and 2021 were as follows:
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Balance, Beginning of Period | $ | 18,312,707 | $ | 18,150,493 | ||||
| Bad debt expense (benefits) | (9,879 | ) | (12,965 | ) | ||||
| Foreign currency translation adjustment | (917,944 | ) | 179,462 | |||||
| Balance, End of Period | $ | 17,384,884 | $ | 18,316,990 | ||||
Loss from Operations
Our operating loss for the six months ended June 30, 2022 was $1.7 million, compared to $1.4 million in the same period in 2021.
Net Interest Expense
Net interest expense for the six months ended June 30, 2022 was $0.23 million, compared to $0.14 million for the same period in 2021.
Net Loss
Net loss for the six months ended June 30, 2022 was $1.9 million, as compared to net loss of $1.6 million for the six months ended June 30, 2021. The decrease of net loss was mainly a result of decreased revenue and increased cost in this period.
For the six months ended June 30, 2022, loss per basic and diluted common share was $0.04, compared to loss per basic and diluted common share of $0.03 for the six months ended June 30, 2021.
The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 47,931,487 for the six months ended June 30, 2022, and 45,579,557 for the six months ended June 30, 2021.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated from operations, bank lines of credit and the Convertible Note Payable. Currently the Company has not witnessed or expected to encounter any difficulties to refinance those line of credit this year. In addition to the aggregated advance of $1,425,123 from our CEO as of December 31,2021, we received some temporary advances from and made several repayments to her in the three months ended June 30, 2022. As of June 30, 2022, the aggregated advance from our CEO was $1,147,252 for use in operations. Our cash and cash equivalents were $2.2 million, representing 12.5% of our total assets, as of June 30, 2022, as compared to $4.9 million, representing 21.5% of our total assets as of December 31, 2021. All of the $2.2 million of cash and cash equivalents as of June 30, 2022 are considered to be reinvested indefinitely in the Company’s Chinese subsidiary, Helpson and are not expected to be available for payment of dividends or for other payments to its parent company or to its shareholders.
The Company obtained various lines of credit in details described under Note 7 to its condensed consolidated financial statements contained in this report which is incorporated by reference herein.
21
The Company issued a convertible note to an institutional accredited investor as disclosed in Note 8 to the condensed consolidated financial statements contained in this report which is incorporated by reference herein.
Although the Company obtained the convertible note and additional lines of credit in 2021, there can be no assurance that the Company will be able to achieve its future strategic goal to accelerate the launch of nutrition products. This raises substantial doubt about the Company’s ability to continue as a going concern. Although our Chairperson and Chief Executive Officer had advanced funds for working capital during the year ended December 31, 2021, there can be no assurances that this will be the case in the future. We may seek additional debt or equity financing as necessary when we believe the market conditions are the most advantageous to us and/or require us to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. There can be no assurance that any additional financing will be available on acceptable terms, if at all.
Operating Activities
Net cash used by operating activities was $1.2 million in the six months ended June 30, 2022, compared to net cash flow of $0.4 million generated in operating activities in the same period in 2021.
As of June 30, 2022, our net accounts receivable was $0.3 million, compared to $0.7 million as of December 31, 2021.
Total inventory was $3.5 million and $3.3 million as of June 30, 2022 and December 31, 2021, respectively.
Investing Activities
There was $0.18 million cash flow under investing activities during the six months ended June 30, 2022, compared to $ 0.02 million for the same period in 2021. Investing activities in the first half of 2022 was mainly for the purchase of equipment.
Financing Activities
Cash flow used in financing activities was $1.13 million in the six months ended June 30, 2022; compared to $0.40 million cash generated in the same period in 2021. The financing activities cash flow used in this period was mainly for the repayment of loans.
According to relevant PRC laws, companies registered in the PRC, including our PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of their after-tax net income, as determined under the accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach fifty percent (50%) of the companies’ registered capital prior to their remittance of funds out of the PRC. Allocations to these reserves and funds can only be used for specific purposes and are not transferrable to the parent company in the form of loans, advances or cash dividends. As of June 30, 2022, and December 31, 2021, Helpson’s net assets totaled $1,511,000 and $3,447,000, respectively. Due to the restriction on dividend distribution to overseas shareholders, the amount of Helpson’s net assets that was designated for general and statutory capital reserves, and thus could not be transferred to our parent company as cash dividends, was 50% of Helpson’s registered capital, which is both $8,145,000 as of June 30, 2022 and December 31, 2021, respectively. Since the amount that Helpson must set aside for the statutory surplus fund only accounts for 539% and 236%, respectively, of its total net assets, this reserve does not have a major impact on our liquidity. There were no allocations to the statutory surplus reserve accounts during the six months ended June 30, 2022.
The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. Our businesses and assets are primarily denominated in RMB. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires the submission of a payment application form together with certain invoices and executed contracts. The currency exchange control procedures imposed by Chinese government authorities may restrict Helpson, our Chinese subsidiary, from transferring its net assets to our parent company through loans, advances or cash dividends.
Off-Balance Sheet Arrangements
As of June 30, 2022, we did not have any off-balance sheet arrangements.
Critical Accounting Policies
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. The discussion of our critical accounting policies contained in Note 1 to our consolidated financial statements, “Organization and Significant Accounting Policies”, is incorporated herein by reference.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and interim Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to management, including our Chief Executive Officer and interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2022 to satisfy the objectives for which they are intended. This was due to the material weakness in our internal control over financial reporting, with respect to our lack of accounting financial reporting personnel who were knowledgeable in U.S. GAAP, as disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 30, 2022. Notwithstanding the aforementioned material weakness, management has concluded that our condensed consolidated financial statements included in this report are fairly stated in all material respects in accordance with U.S. GAAP for each period presented herein.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 6. Exhibits
The exhibits required by this item are set forth in the Exhibit Index attached hereto.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CHINA PHARMA HOLDINGS, INC. | ||
| Date: August 11, 2022 | By: | /s/ Zhilin Li |
| Name: Zhilin Li | ||
| Title: President and Chief Executive Officer | ||
| (principal executive officer) | ||
| Date: August 11, 2022 | By: | /s/ Zhilin Li |
| Name: Zhilin Li | ||
| Title: Interim Chief Financial Officer | ||
| (principal financial officer and principal accounting officer) | ||
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EXHIBIT INDEX
| No. | Description | |
| 31.1 - | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 - | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 - | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS - | Inline XBRL Instance Document | |
| 101.SCH - | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL - | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF - | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB - | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE - | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 - | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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