# China Pharma Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2017

- Company: [China Pharma Holdings, Inc.](/companies/cphi.md) (CIK 1106644)
- Form: 10-Q
- Filed: 2017-11-14
- Accepted by EDGAR: Nov 14, 2017, 15:57 ET
- Period: 2017-09-30
- Accession: 0001213900-17-012067
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1106644/000121390017012067/f10q0917_chinapharma.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1106644/000121390017012067/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-07-01 to 2017-09-30 | $3.2m | us-gaap:Revenues |
| Revenue | 9 months, 2017-01-01 to 2017-09-30 | $9.4m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2017-07-01 to 2017-09-30 | $2.7m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2017-01-01 to 2017-09-30 | $7.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2017-07-01 to 2017-09-30 | $421.5k | us-gaap:GrossProfit |
| Gross profit | 9 months, 2017-01-01 to 2017-09-30 | $1.8m | us-gaap:GrossProfit |
| Research and development | 3 months, 2017-07-01 to 2017-09-30 | $27.5k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2017-01-01 to 2017-09-30 | $75.1k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | −$2.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-01-01 to 2017-09-30 | −$5.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-07-01 to 2017-09-30 | $130.8k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2017-01-01 to 2017-09-30 | $412.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | $31.2k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-01-01 to 2017-09-30 | $92.1k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | −$2.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-01-01 to 2017-09-30 | −$5.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | −$0.05 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | −$0.13 | us-gaap:EarningsPerShareBasicAndDiluted |
| Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $67.3k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-09-30 | $1.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $15.0m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $75.0m | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $10.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $18.0m | us-gaap:Liabilities |
| Long-term debt | at 2017-09-30 | $9.2m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2017-09-30 | $57.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,704 characters.

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”, “may” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the readers of the forward-looking statements that any such statements that are 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, products and other factors, some of which are described in this report and some of which are discussed in our other periodic filings with the Securities and Exchange Commission. 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

In November 2014, we received a Good Manufacturing Practices (“GMP”) certificate issued by the China Food and Drug Administration (“CFDA”) for dried powder and liquid injectable product lines produced at our new manufacturing facility, which allowed us to resume production of products with those formulations that had previously been suspended since year end 2013 due to our inability to meet a GMP upgrade deadline. Prior to November 2014, due to these same GMP compliance timing issues, we also missed certain drug bids (generally with terms of around two years) in several Chinese provinces. These missed bids negatively impacted our previously-established market share in those provinces, and reduced our overall sales in 2015 and 2016. Nevertheless, we continue to concentrate on enhancing the fundamentals of our business. In January and December 2015, we completed upgrades to our previously existing manufacturing facilities and received new GMP certificates for our tablet and capsule product lines and for the cephalosporin product. These upgrades were completed ahead of the deadline of the oral solution product lines under the new GMP requirement, which have positioned us to better meet market demand.

In order to support our existing products package we remain focused on pipeline development. However, we have experienced delays in obtaining approval for certain products in our pipeline because of revisions of and enhancements to CFDA approval criteria and processes required by CFDA. These revisions have resulted in additional supplemental materials and trials, higher costs, and longer approval times for certain applications.

On March 5, 2016, the Chinese State Council issued “*Opinions on Carrying out Consistency Evaluations of the Quality and Efficacy of Generic Drugs”* (the “Opinions”). The Opinions define the object of evaluations and establish deadlines, determine selection criteria for reference drugs, call for a rational selection of evaluation methods, identify pharmaceutical manufacturers as the principle in generic drug consistency evaluations, and set forth corresponding incentives. In May, 2016, the CFDA issued “*Comments from the General Office of the State Council on the Consistency Evaluations of the Efficacy and Quality of Generic Drugs”* in order to further elaborate on assessment processes and related technical rules. Consistency evaluations apply to the majority of our current existing marketed and pipeline products. Complying with consistency evaluations will become our core task in the near future and will have a significant impact on our operations as well as our industrial structure.

As a result, the status of our pipeline products as of September 30, 2017 remains the same as we reported in our Annual Report on Form 10-K for the year ended December 31, 2016.

### Market Trends

Consumer demand for medicine is relatively rigid and stable and is generally unaffected by seasonal business cycles. We have noticed that the growth rates of the pharmaceutical manufacturing industry have been higher than GDP growth rates in China. According to the study “*Deepening The Reform of China’s Medical and Healthcare System and Building A Value-Based Quality Service Delivery System”* published by the World Bank, if China maintains its existing healthcare system, total health expenditures will increase from 5.5% of GDP in 2014 to over 9% of GDP in 2035, with an average annual growth rate of 8.4%.

The rapid development of the pharmaceutical industry in China has been driven by the continuous growth of total healthcare costs, the establishment and improvement of the universal Medicare system, increases in medical expenditures per capita, the aging population, and changes in the disease spectrum; however, development has been negatively impacted by factors like Medicare cost controls and price pressure in drug tenders in recent years.

The PRC State Council issued “*Guidance on the Pilot Comprehensive Reform of Urban Public Hospitals”* in 2015, which proposed that the pilot comprehensive reform of urban public hospitals be fully implemented and that the personal spending component of total hygiene expenditures be reduced to 30% or lower by 2017. In order to achieve this goal, the Chinese government’s ongoing investment will be essential. The Central Committee Political Bureau of the Communist Party of China approved the “Healthy China 2030 Plan” in August 2016, which proposed to reduce personal hygiene spending to approximately 28% of total healthcare expenditures by 2020, and 25% of total healthcare expenditures by 2030.

In order to achieve the objectives of the above-mentioned “Healthy China 2030 Plan” in the context of an aging population and an improving universal Medicare system, we believe that the hygiene spending proportion of total fiscal expenditures will increase and that net annual Medicare expenditures will increase as well. We anticipate that the use of generic drugs as a cost-effective medical solution will be further promoted as a way to reduce the payment pressures of Medicare. As a generic drug company, we are presented with a huge domestic market, and through further upgrades, especially in regards to compliance with consistency evaluations, we could meet European and American production standards, enabling us to engage overseas markets through product exports.

In general, demand for pharmaceutical products is still experiencing steady growth in China. We will continue to actively adapt to state policy guidance and further evaluate market conditions for our current existing products, pipeline products, and competition in the market in order to optimize our development strategy.

### Results of Operations for the Three Months Ended September 30, 2017 and 2016

Under the industrial reform and modification background guided by the government’s healthcare reform policies, we have actively completed the new GMP upgrades for the majority of our current production facilities, and have been aggressively promoting our sales to regain our original market shares. Although there was no immediate reversal of sales trends so far, due to the special characteristics of pharmaceutical industry, we strongly believe that our current operations and financial position will allow us to have a foundation for steady business growth in the future.

Net loss for the three months ended September 30, 2017 was $2.2 million, compared to net loss of $1.7 million for three months ended September 30, 2016. The difference in performance between the third quarters in 2017 and 2016 was mainly due to the increase in impairment of long term assets in the three months ended September 30, 2017, compared to the same period in 2016.

### Revenue

Revenues were $3.2 million and $3.1 million for the three months ended September 30, 2017 and 2016 respectively.

### Sales Revenue by Major Category (Dollars in Millions)

Set forth below are our revenues by product category in millions USD for the three months ended September 30, 2017 and 2016:

| Product Category | Three Months Ended September 30, 2017 | 2016 | Net% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 0.48 | 0.57 | -0.09 | -16% |
| Anti-Viro/ Infection & Respiratory | 1.67 | 1.78 | -0.11 | -6% |
| Digestive Diseases | 0.31 | 0.22 | 0.09 | 41% |
| Other | 0.70 | 0.56 | 0.14 | 25% |

The most significant revenue decrease in terms of dollar amount was in our “Anti-Viro/Infection & Respiratory” category which has decreased by $0.11 million to $1.67 million in the third quarter of 2017 as compared to $1.78 million in the same period of 2016, which was mainly affected by the sales decrease of Cefaclor due to market fluctuation.

The “Other” product category generated $0.70 million in sales revenue in the third quarter of 2017, as compared to $0.56 million in the same period of 2016, an increase of $0.14 million. This increase was mainly due to the increase in sales of Vitamin B6 due to market fluctuation.

Our “Digestive Diseases” category generated $0.31 million of sales in the third quarter of 2017 as compared to $0.22 million in the same period of the previous year, which represented an increase of $0.09 million.

Sales in our “CNS Cerebral & Cardio Vascular” category generated $0.48 million in sales revenue in the third quarter of 2017 as compared to $0.57 million in the same period of 2016, a decrease of $0.09 million.

| Product Category | Three Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 15% | 18% |
| Anti-Viro/ Infection & Respiratory | 53% | 57% |
| Digestive Diseases | 10% | 7% |
| Other | 22% | 18% |

For the three months ended September 30, 2017, revenue breakdown by product category remained comparable to that of the prior year. Sales of the “Anti-Viro/Infection & Respiratory” products category represented 53% and 57% of total sales in the three months ended September 30, 2017 and 2016. The “Other” category represented 22% and 18% of total sales in the three months ended September 30, 2017 and 2016. The “CNS, Cerebral & Cardio Vascular” category represented 15% and 18% of total sales in the three months ended September 30, 2017 and 2016. The “Digestive Diseases” category represented 10% of total revenue in the third quarter of 2017 compared to 7% in the third quarter of 2016.

### Cost of Revenue

For the three months ended September 30, 2017, our cost of revenue was $2.7 million, or 86.7% of total revenue, and $2.8 million, or 88.8% of total revenue, in the same period of 2016.

### Gross Profit and Gross Margin

Gross profit was $0.4 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively. Our gross profit margin in the third quarter of 2017 was 13.3% compared to 11.2% in the same period 2016.

### Selling Expenses

Our selling expenses for the three months ended September 30, 2017 were $0.7 million, which accounted for 21.7% of the total revenue in the third quarter of 2017, compared to $1.0 million for the same period 2016, which accounted for 29.7% of the total revenue in the third quarter of 2016 Due to many adjustments in our selling processes under healthcare reform policies, despite the decrease in sales, we still need to maintain personnel and continue our sales activities to support the sales and collection of accounts receivable, therefore our selling expenses did not decrease proportionally to our sales.

### General and Administrative Expenses

Our general and administrative expenses for the three months ended September 30, 2017 and September 30, 2016, were both $0.3 million. General and administrative expenses accounted for 11.0% and 9.4% of our total revenues in the third quarters of 2017 and 2016, respectively.

### Research and Development Expenses

Our research and development expenses were $0.03 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively. Research and development expenses accounted for 0.9% and 3.2% of our total revenues in the third quarters of 2017 and 2016, respectively.

### Bad Debt Expense (Benefit )

Our bad debt expense for the three months ended September 30, 2017 was $0.2 million, compared to a bad debt benefit of $0.1 million in the three months ended September 30, 2016. The change was due to the increase of aged accounts receivables.

In general, our regular credit or payment terms offered to customers are 90 days. This has not changed in recent years. Due to the peculiarity of the Chinese pharmaceutical market environment, deferred payments to pharmaceutical companies by state-owned hospitals and local medicine distributors are a normal phenomenon. Our customers are primarily pharmaceutical distributors who sell our products to mostly government-backed hospitals. Therefore, the aging of our receivables from our customers tend to be long.

The amount of accounts receivable that were past due (or the amount of accounts receivable that were more than 90 days old) was $2.8 million and $3.6 million as of September 30, 2017 and December 31, 2016, respectively.

The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of September 30, 2017 and December 31, 2016:

|  | September 30, 2017 | December 31, 2016 |
| --- | ---: | ---: |
| 1 - 90 Days | 3.0% | 8.8% |
| 90 - 180 Days | 1.9% | 2.6% |
| 180 - 360 Days | 7.3% | 6.7% |
| 360 - 720 Days | 10.6% | 13.4% |
| \> 720 Days | 77.2% | 68.5% |
| Total | 100.0% | 100.0% |

Our bad debt allowance estimate is currently the sum of 10% of accounts receivable that are less than 365 days old, 70% of accounts receivable that are between 365 days and 720 days old and 100% of accounts receivable that are greater than 720 days old.

We recognize bad debt expense per actual write-offs as well as the 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 benefit for the difference. The allowance for doubtful accounts was $17.6 million and $15.7 million as of September 30, 2017 and December 31, 2016, respectively.

### Impairment of Long-Term Assets

During the third quarter of 2017 the Company reviewed the contracts relating to advances made for purchases of intangible assets with independent laboratories and determined that advances made by the Company for two formulas to two independent laboratories were impaired. As a result, the Company recognized an impairment loss for the advances made to these laboratories in the amount of $1.2 million. In the same period in 2016, the Company also recognized $0.6 million impairment loss for the advances made to one laboratory for one formula per the evaluation.

### Loss from Operations

Our operating loss for the three months ended September 30, 2017 was $2.1 million, compared to $1.5 million in the same period 2016 The operating loss for this period is mainly due to the increase in impairment of long term assets.

### Interest Expense

Interest expense for the three months ended September 30, 2017 was $0.1 million, compared to $0.2 million in the same period 2016, which represented a decrease of $0.1 million.

### Income Tax Expense

Our income tax rate was 25% for the three months ended September 30, 2017, and 15% for the three months ended September 30, 2016. Our income tax expense was ($0.03) million and ($0.02) million for the three months ended September 30, 2017 and 2016, respectively. The expense arose as a result of certain deferred tax liabilities recognized in prior years. We renewed our “National High-Tech Enterprise” status with the Chinese government in the third quarter of 2013. With this designation, for the years ending December 31, 2015 and 2016, we enjoyed a preferential tax rate of 15%, which is notably lower than the statutory income tax rate of 25%. However, our recent net loss results have put the Company in an unfavorable position for the potential renewal of “National High-Tech Enterprise” status in 2017, and after evaluating the feasibility of such a renewal, the Company has decided not to renew this status. As a result, our tax rate for 2017 and the foreseeable future will be 25%.

### Net Loss

Net loss for three months ended September 30, 2017 was $2.2 million, compared to net loss of $1.7 million for the three months ended September 30, 2016. The change in the net result was mainly due to the increase in impairment of long term asset in the third quarter of 2017 as compared to the same period of 2016.

For the three months ended September 30, 2017, loss per basic and diluted common share was $0.05, compared to $0.04 for the three months ended September 30, 2016.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 43,579,557 for both the three months ended September 30, 2017 and 2016.

### Results of Operations for the nine months ended September 30, 2017 and 2016

### Revenue

For the nine months ended September 30, 2017, our sales revenue was $9.4 million, which represented a decrease of $0.9 million, or 9.2%, from the $10.3 million in the corresponding period of 2016. This decrease was primarily due to the decrease in sales of Cefaclor and Gastrodin.

Set forth below are our revenues by product categories in millions USD for each of the nine months ended September 30, 2017 and 2016.

### Sales Revenue by Major Category (Dollars in Millions)

| Product Category | Nine Months Ended September 30, 2017 | 2016 | Net% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 1.41 | 1.78 | -0.37 | -21% |
| Anti-Viro/ Infection & Respiratory | 5.75 | 6.76 | -1.01 | -15% |
| Digestive Diseases | 0.61 | 0.58 | 0.03 | 5% |
| Other | 1.60 | 1.19 | 0.41 | 34% |

The most significant decrease in revenue in terms of dollar amount was in our “Anti-Viro/ Infection & Respiratory” product category, which generated $5.75 million in sales revenue in the nine months ended September 30, 2017, compared to $6.76 million in the nine months ended September 30, 2016, a decrease of $1.01 million. This decrease was mainly caused by the decrease in sales of Cefactor due to market fluctuation.

“Other” category increased by $0.41 million to $1.60 million in the nine months ended September 30, 2017 compared to $1.19 million in the same period of 2016 and the increase was mainly due to the sales increase in Vitamin B6 for Injection due to market fluctuation.

Our “CNS Cerebral & Cardio Vascular” category generated $1.41 million of sales in the nine months ended September 30, 2017, compared to $1.78 million in the same period of 2016, which represented a decrease of $0.37 million. This decrease was mainly due to the sales decrease of Alginic Sodium Diester Injection product due to market fluctuation.

Sales of the “Digestive Diseases” generated $0.61 million and $0.58 million in the nine months ended September 30, 2017 and 2016, respectively.

### Cost of Revenue

For the nine months ended September 30, 2017, our cost of revenue was $7.6 million, or 81% of total revenue, which represented a decrease of $1.3 million from $8.8 million, or 86% of total revenue, in the same period of 2016. The decrease in cost of revenue in the nine months ended September 30, 2017 was mainly due to the decrease in revenue, as well as the increase in efficiency of raw material consumption due to our machinery and equipment ran more smoothly.

### Gross Margin and Gross Profit

Gross profit for the nine months ended September 30, 2017 was $1.8 million, compared to $1.5 million in the same period of 2016. Gross profit margin for the nine months ended September 30, 2017 and 2016 were 19% and 14%, respectively.

### Selling Expenses

Our selling expenses for the nine months ended September 30, 2017 were $2.2 million, a decrease of $0.6 million, or 20%, compared to $2.8 million for the same period of 2016. Selling expenses accounted for 23.6% and 26.7% of the total revenue in the first nine months of 2017 and 2016 respectively. Despite the decrease in sales, we still rely on comparable personnel and expenses to support our revenue and collection of accounts receivable. In addition, once we receive a new GMP certificate for our new building, we intended to recover our market share that requires additional selling expenses and marketing efforts.

### General Administrative Expenses

Our general and administrative expenses for the nine months ended September 30, 2017 and 2016 were both $1.4 million.

### Research and Development Expenses

Our research and development expenses for the nine months ended September 30, 2017 were $0.1 million, compared to $0.3 million in the same period of 2016.

### Bad Debt Expenses

Our bad debt expenses for the nine months ended September 30, 2017 and 2016 were both $1.0 million. Please see additional discussion of bad debt and account receivables in the section above named “Bad Debt Benefit”. The changes in the allowance for doubtful accounts during the nine months ended September 30, 2017 and 2016 were as follows:

|  | For the Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Balance, Beginning of Period | $15,664,496 | $28,644,398 |
| Bad debt expense | 954,518 | 1,005,949 |
| Foreign currency translation adjustment | 1,022,421 | (270,150) |
| Balance, End of Period | $17,641,435 | $29,380,197 |

10

### Impairment of Long-Term Assets

During the nine months ended September 30, 2017, the Company reviewed the contracts relating to advances made for purchases of intangible assets with independent laboratories and determined that the advances made by the Company for three formulas to two of the independent laboratories were impaired. As a result, the Company recognized an impairment loss for the advances made to these laboratories in the amount of $2.2 million. In the same period in 2016, the Company also recognized $1.5 million impairment loss for the advances made to three laboratory for one formula per the evaluation.

### Loss from Operations

Our operating loss for the nine months ended September 30, 2017 was approximately $5.0 million, compared to $5.1 million for the same period of 2016.

### Net Loss

Our net loss for the nine months ended September 30, 2017 and 2016 was $5.5 million and $5.8 million, respectively, which represented an improvement of $0.3 million.

### Liquidity and Capital Resources

Our principal sources of liquidity are cash generated from operations and short-term bank loans. Our cash and cash equivalents were $1.1 million, which represents 1.5% of our total assets as of September 30, 2017 as compared to $2.7 million, which represents 3.4% of our total assets as of December 31, 2016. All of the $1.1 million cash and cash equivalents as of September 30, 2017 is considered to be reinvested indefinitely in Helpson and is not expected to be available for payment of dividends, for other payments to our parent company or to its shareholders. We entered into an eight-year construction loan facility on September 21, 2013. The total loan facility amount is RMB 80 million (approximately $13 million), which had been fully utilized through May 7, 2014. We have accumulatively repaid the principal of RMB 20 million (approximately $3.0 million) of the construction loans per the payback schedule as of September 30, 2017. The current balance of the construction loan facility is $2.3 million as of September 30, 2017. During July of 2017, the Company made the required payment of RMB 9 million (approximately $1,320,000). The cash flow generated from operating activities was used to fund our daily operating expenses as well as repayment of our loan facility.

Based on our current operating plan, management believes that our cash provided by operations will be sufficient to meet our working capital needs and our anticipated capital expenditures, including expenditures for new formula acquisitions and the remaining new GMP upgrade related construction and equipment in our prior facility for the next twelve months. However, if circumstances change and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing as necessary for expansion purposes and when we believe market conditions are most advantageous, which may include debt and/or equity financing. 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 $0.1 million in the nine months ended September 30, 2017 compared to $1.4 million generated for the nine months ended September 30, 2016.

As of September 30, 2017, our net accounts receivable was $2.9 million, compared to $4.0 million as of December 31, 2016.

As of September 30, 2017, net inventory was $6.8 million, compared to $7.3 million as of December 31, 2016. This decrease was mainly due to the decrease in purchases in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

### Investing Activities

During the nine months ended September 30, 2017, net cash used in investing activities was both $0.1 million for the nine months ended September 30, 2017 and 2016, respectively.

### Financing Activities

Cash flow used in financing activities was $1.5 million in the nine months ended September 30, 2017, which related to the payment of the construction term loan. While cash flow used in financing activities was $3.8 million in the nine months ended September 30, 2016, which related to the payment of the construction term loan and the payment on the line of credit.

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 accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach fifty percent (50%) of the companies’ 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 September 30, 2017 and December 31, 2016, the net assets of Helpson were $53,578,000 and $57,461,000, respectively. Due to the restriction on dividend distribution to overseas shareholders, the amount of Helpson’s net assets that were designated for general and statutory capital reserves, and thus could not be transferred to our parent company as cash dividends, were $8,145,000 and $8,145,000 (50% of registered capital) for as of September 30, 2017 and December 31, 2016, respectively. Since the amount that Helpson must set aside for the statutory surplus fund only accounts for 15.2% and 14.2%, 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 nine months ended September 30, 2017.

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 the Chinese government authorities may restrict the ability of Helpson, our Chinese subsidiary, to transfer its net assets to our parent company through loans, advances or cash dividends.

### Off-Balance Sheet Arrangements

As of September 30, 2017, we did not have any off-balance sheet arrangements.

### Commitments

As of September 30, 2017, we were obligated to pay laboratories and others approximately $2.8 million over the next four years upon completion of the various phases of contracts to provide CFDA production approval of medical formulas.

### 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.

## Market risk

As filed, 139 characters.

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.

## Controls and procedures

As filed, 1,924 characters.

### 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 effective as of September 30, 2017.

### 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.

Filed Nov 14, 2017.
Source: SEC EDGAR, the filing index for accession 0001213900-17-012067. Last ingested by Listed: Nov 11, 2026, 00:23 ET. No prices; not investment advice.