# China Pharma Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2018

- Company: [China Pharma Holdings, Inc.](/companies/cphi.md) (CIK 1106644)
- Form: 10-Q
- Filed: 2018-08-14
- Accepted by EDGAR: Aug 14, 2018, 16:02 ET
- Period: 2018-06-30
- Accession: 0001213900-18-010992
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1106644/000121390018010992/f10q0618_chinapharma.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1106644/000121390018010992/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-04-01 to 2018-06-30 | $3.2m | us-gaap:Revenues |
| Revenue | 6 months, 2018-01-01 to 2018-06-30 | $6.8m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-04-01 to 2018-06-30 | $2.6m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2018-01-01 to 2018-06-30 | $5.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-04-01 to 2018-06-30 | $579.5k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2018-01-01 to 2018-06-30 | $1.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-04-01 to 2018-06-30 | $23.7k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2018-01-01 to 2018-06-30 | $45.9k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2018-04-01 to 2018-06-30 | −$864.4k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2018-01-01 to 2018-06-30 | −$1.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-04-01 to 2018-06-30 | $130.6k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2018-01-01 to 2018-06-30 | $259.7k | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $22.6k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-01-01 to 2018-06-30 | $48.6k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | −$1.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | −$1.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | −$0.02 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2018-01-01 to 2018-06-30 | −$0.03 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | $124.4k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2018-01-01 to 2018-06-30 | $30.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-06-30 | $1.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-06-30 | $13.1m | us-gaap:AssetsCurrent |
| Total assets | at 2018-06-30 | $58.3m | us-gaap:Assets |
| Current liabilities | at 2018-06-30 | $9.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-06-30 | $17.3m | us-gaap:Liabilities |
| Long-term debt | at 2018-06-30 | $8.9m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2018-06-30 | $41.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,196 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 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

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 principal in generic drug consistency evaluations, and set forth corresponding incentives. Subsequently, 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 May 2016, in order to further elaborate on assessment processes and related technical rules. Consistency evaluations apply to the majority of our existing marketed and pipeline products. In this environment, management has assessed each pipeline product based on the adjusted CFDA approval criteria and clinical trial requirements, as well as the estimated additional investment for consistency evaluations, and potential return of investment once launched into the market; and decided to terminate the progression of certain pipeline products. Complying with consistency evaluations has become our core task, and therefore, will have a significant impact on our operations as well as our industrial structure.

Under the requirements of the consistency evaluations policy, the Company actively evaluated the technical difficulty, investment demand, time requirement, and investment return rate of all applicable marketed products and pipeline products. We also actively promoted the compliance process for some key products since 2017.

Increasing our sales remains our top priority. Through the continued implementation of sales promotion, the Company realized sales increases in the first half of 2018 compared to the same period a year ago. Management will continue to vigorously promote sales by actively participating in the recent opening of the new provincial drug tender and participation in drug exhibitions.

In order to support our existing products package we remain focused on pipeline development. 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. These revisions have resulted in additional supplemental materials and trials, higher costs, and longer approval times for certain applications.

The status of our pipeline products as of June 30, 2018 remains the same as we reported in our Annual Report on Form 10-K filed with the SEC on April 2, 2018.

### Market Trends

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 health-care insurance 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 health-care insurance cost controls and price pressure in drug tenders in recent years.

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.

Related to the above, in order to achieve the objectives of the Healthy China 2030 Plan in the context of an aging population and an improving universal health-care insurance system, we believe that the hygiene spending proportion of total fiscal expenditures by government will increase and that net annual health-care insurance 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 health-care insurance. As a generic drug company we are presented with a huge domestic market, and through further upgrades, especially in compliance with consistency evaluations, we could meet European and American production standards, enabling us to export products to overseas markets.

In August 2015, the State Council promulgated the “*Opinions on Examination and the Approval System for the Reform of Drugs and Medical Devices”*, which was the prelude to the reform of the drug examination and approval system, the reform of the drug registration system, consistency evaluations of generic drugs, and enhanced drug listing licensing systems, among other reforms in China. The CFDA has also subsequently introduced a number of specific measures and technical details related to various areas of the above-mentioned reforms. These policies may change the existing competition landscape, development methods, and operating patterns and rules of the pharmaceutical industry and may have a significant impact on the strategic choices and future development models of Chinese pharmaceutical companies.

In summary, demand for pharmaceutical products is still experiencing steady growth in China. The ongoing generic drug consistency evaluations and reform of China’s drug production registration and review policies are expected to have major effects on the future development of our industry and may change its business patterns. We will continue to actively adapt to state policy guidance and further evaluate market conditions for our current products, pipeline products, and competition in the market in order to optimize our development strategy.

### Results of Operations for the Three Months Ended June 30, 2018

### Revenue

Revenue increased by 8.8% to $3.2 million for the three months ended June 30, 2018, as compared to $3.0 million for the three months ended June 30, 2017. This increase was mainly due to market volatility.

Set forth below are our revenues by product category in millions (USD) for the three months ended June 30, 2018 and 2017:

| Product Category | Three Months Ended June 30, 2018 | 2017 | Net Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 0.74 | 0.45 | 0.29 | 66% |
| Anti-Viral/ Infection & Respiratory | 1.47 | 1.90 | -0.44 | -23% |
| Digestive Diseases | 0.25 | 0.13 | 0.12 | 91% |
| Other | 0.72 | 0.44 | 0.28 | 62% |

The most significant revenue decrease in terms of dollar amount was in our “Anti-Viral/Infection & Respiratory” product category, which generated $1.47 million in sales revenue in the three months ended June 30, 2018 compared to $1.90 million in the same period last year, a decrease of $0.44 million. This decrease was mainly due to the sales decrease of our Cefaclor Dispersible Tablets in this category, which was a result of market fluctuation.

Sales in the “CNS Cerebral & Cardio Vascular” category increased by $0.29 million to $0.74 million in the three months ended June 30, 2018 compared to $0.45 million in the same period last year, which increase was mainly due to an increase in sales of Ozagrel, primarily the result of volatility in market demand.

Our “Other” product category sales increased by $0.28 million to $0.72 million in the three months ended June 30, 2018 from $0.44 million in the same period last year, mainly due to the increase in sales of Vitamin B6 caused by market volatility.

Our “Digestive Diseases” category generated $0.25 million and $0.13 million of sales in the three months ended June 30, 2018 and 2017, respectively.

| Product Category | Three Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 23% | 15% |
| Anti-Viral/ Infection & Respiratory | 46% | 65% |
| Digestive Diseases | 8% | 5% |
| Other | 23% | 15% |

For the three months ended June 30, 2018, revenue breakdown by product category had several changes to that of the prior year. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 46% and 65% of total sales in three months ended June 30, 2018 and 2017, respectively. The “CNS Cerebral & Cardio Vascular” category represented 23% of total revenue in the three months ended June 30, 2018, compared to 15% in the three months ended June 30, 2017. The “Other” category represented 23% of total revenue in the three months ended June 30, 2018, compared to 15% in the three months ended June 30, 2017. The “Digestive Diseases” category represented 8% and 5% of total revenue in the three months ended June 30, 2018 and 2017, respectively.

### Cost of Revenue

For the three months ended June 30, 2018, our cost of revenue was $2.6 million, or 81.7% of total revenue, which represented an increase of $0.3 million from $2.3 million, or 77.8% of total revenue, in the same period last year.

### Gross Profit and Gross Margin

Gross profit was $0.6 million for each of the three months ended June 30, 2018 and 2017. Our gross profit margin in the three months ended June 30, 2018 was 18.3% compared to 22.2% in the same period last year. This decrease was primarily due to more sales of lower margin products in this period compared to the sales performance in the same period last year.

### Selling Expenses

Our selling expenses for the three months ended June 30, 2018 were $0.7 million, a decrease of $0.1 million, compared to $0.8 million for the three months ended June 30, 2017. Selling expenses accounted for 22.5% of the total revenue in the three months ended June 30, 2018 compared to 27.5% in the same period last year.

### General and Administrative Expenses

Our general and administrative expenses for the three months ended June 30, 2018 were $0.4 million, which represented a decrease of $0.3 million compared to $0.6 million in the same period last year. General and administrative expenses accounted for 11.1% and 21.0% of our total revenues in three months ended June 30, 2018 and 2017, respectively.

### Research and Development Expenses

Our research and development expenses were $0.02 million for each of the three months ended June 30, 2018 and 2017. The consistency evaluations discussed under the “Business Overview & Recent Developments” section hereof has had and is expected to continue to have a significant impact on all generic products not only in our pipeline, but also throughout the existing Chinese market. Because of the continuous introduction of detailed implementation rules under this policy, our pipeline did not have any further development in the three months ended June 30, 2018.

### Bad Debt Expenses

Our bad debt expenses were $0.4 million for each of the three months ended June 30, 2018 and 2017.

In general, our normal credit or payment terms extended to customers are for 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 that sell our products to mostly government-backed hospitals. Therefore, the aging of our receivables from our customers tends to be longer-term.

The amount of net accounts receivable that were past due (or the amount of accounts receivable that were more than 90 days old) was $1.4 million and $2.2 million as of June 30, 2018 and December 31, 2017, respectively.

The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of June 30, 2018 and December 31, 2017:

|  | June 30, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| 1 - 90 Days | 5.0% | 3.9% |
| 90 - 180 Days | 2.4% | 1.6% |
| 180 - 360 Days | 2.5% | 2.4% |
| 360 - 720 Days | 8.6% | 13.6% |
| \> 720 Days | 81.5% | 78.5% |
| Total | 100.0% | 100.0% |

18

Our bad debt allowance estimate is currently 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 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 benefit for the difference. The allowance for doubtful accounts was $18.2 million as of each of June 30, 2018 and December 31, 2017. The changes in the allowances for doubtful accounts during the three months ended June 30, 2018 and 2017 were as follows:

|  | For the Three Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Balance, Beginning of Period | $18,865,079 | $16,161,252 |
| Bad debt expense | 350,847 | 364,989 |
| Foreign currency translation adjustment | -977,678 | 278,980 |
| Balance, End of Period | $18,238,248 | $16,805,221 |

#### Impairment of Long-Term Assets

There was no impairment for long-term assets for the three months ended June 30, 2018; and the Company recognized an impairment related to “Advances for purchases of intangible assets” in the amount of $1.0 million for the three months ended June 30, 2017, as 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 a few formulas to the independent laboratories to which the Company had made advances were impaired. There is no such situation during the three months ended June 30, 2018.

### Loss from Operations

Our operating loss for the three months ended June 30, 2018 was $0.9 million, compared to an operating loss of $2.1 million in the same period last year.

### Net Interest Expense

Net interest expense was $0.1 million for each of the three months ended June 30, 2018 and 2017, respectively.

### Income Tax Expense

Our income tax rate for our wholly owned subsidiary, Hainan Helpson Medical & Biotechnology Co., Ltd. (“Helpson”) was 25% for each of the three months ended June 30, 2018 and 2017. Our income tax expense was $0.02 million and $0.03 million for the three months ended June 30, 2018 and 2017, 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, Helpson’s tax rate for 2017 and the foreseeable future will be 25%.

### Net Loss

Net Loss for the three months ended June 30, 2018 was $1.0 million, compared to net loss of $2.3 million for the three months ended June 30, 2017.

For the three months ended June 30, 2018, loss per basic and diluted common share was $0.02, compared to loss per basic and diluted share of $0.05 for the three months ended June 30, 2017.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 43,579,557 for each of the three months ended June 30, 2018 and 2017.

### Results of Operations for the Six Months Ended June 30, 2018

### Revenue

Revenue increased by 9.5% to $6.8 million for the six months ended June 30, 2018, as compared to $6.2 million for the six months ended June 30, 2017. This increase was mainly due to market volatility.

Set forth below are our revenues by product category in millions (USD) for the six months ended June 30, 2018 and 2017, respectively:

| Product Category | Six Months Ended June 30, 2018 | 2017 | Net Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 1.25 | 0.93 | 0.32 | 35% |
| Anti-Viral/ Infection & Respiratory | 3.81 | 4.08 | -0.27 | -7% |
| Digestive Diseases | 0.42 | 0.30 | 0.12 | 38% |
| Other | 1.31 | 0.90 | 0.42 | 46% |

The most significant revenue increase in terms of dollar amount was in our “Other” product category, which generated $1.31 million in sales revenue in the six months ended June 30, 2018 compared to $0.90 million in the same period a year ago, an increase of $0.42 million. This increase was mainly due to sales increase of Vitamin B6 due to market volatility.

“CNS Cerebral & Cardio Vascular” category, which generated $1.25 million in sales revenue in the six months ended June 30, 2018 compared to $0.93 million in the same period a year ago, an increase of $0.32 million. This increase was mainly due to sales increase of Ozagrel due to market volatility.

Sales of our Digestive Diseases category also increased by $0.12 million to $0.42 million in the six months ended June 30, 2018 from $0.30 million in the same period in 2017, mainly due to the increase in sales of Omeprazole, caused by market volatility.

Sales in the “Anti-Viral/ Infection & Respiratory” category decreased by $0.27 million to $3.81 million in the six months ended June 30, 2018 compared to $4.08 million in the same period in 2017. This decrease was mainly due to sales decrease of Cefaclor due to market volatility.

| Product Category | Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 19% | 15% |
| Anti-Viral/ Infection & Respiratory | 56% | 66% |
| Digestive Diseases | 6% | 5% |
| Other | 19% | 14% |

20

For the six months ended June 30, 2018, revenue breakdown by product category showed certain changes compared to that of the same period in 2017. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 56% and 66% of total sales in the six months ended June 30, 2018 and 2017, respectively. The “CNS Cerebral & Cardio Vascular” category represented 19% and 15% of total revenue in the six months ended June 30, 2018 and 2017, respectively. The “Other” category represented 19% and 14% of revenues in 2018 and 2017, respectively. And the “Digestive Diseases” category represented 6% and 5% of total revenue in the six months ended June 30, 2018 and 2017, respectively.

### Cost of Revenue

For the six months ended June 30, 2018, our cost of revenue was $5.2 million, or 76% of total revenue, while cost of revenue was $4.8 million, or 78% of total revenue, in the same period in 2017.

### Gross Profit and Gross Margin

Gross profit for the six months ended June 30, 2018 was $1.6 million, compared to $1.4 million in the same period in 2017. Our gross profit margin in the six months ended June 30, 2018 was 24.1% compared to 22.0% in the same period in 2017. The increase in our gross profit margin was mainly due to the increase in sales of higher margin products in the first half of 2018.

### Selling Expenses

Our selling expenses for the six months ended June 30, 2018 and 2017 were $1.4 million and $1.5 million, respectively. Selling expenses accounted for 20.5% of the total revenue in the six months ended June 30, 2018 compared to 24.5% in the same period in 2017.

### General and Administrative Expenses

Our general and administrative expenses for the six months ended June 30, 2018 were $0.8 million, which represented a decrease of $0.2 million compared to $1.0 million in the same period in 2017. General and administrative expenses accounted for 12.4% and 16.6% of our total revenues in the six months ended June 30, 2018 and 2017, respectively.

### Research and Development Expenses

Our research and development expenses for each of the six months ended June 30, 2018 and 2017 were $0.05 million. The consistency evaluations discussed under the “Business Overview & Recent Developments” section hereof has had and is expected to continue to have a significant impact on all generic products not only in our pipeline, but also throughout the existing Chinese market. Because of the continuous introduction of detailed implementation rules under this policy, our pipeline did not have any further development in the first half in 2018.

### Bad Debt Expenses

Our bad debt expenses for the six months ended June 30, 2018 was $0.4 million, which represented a decrease of $0.4 million compared to $0.7 million in the same period in 2017. The decrease in our bad debt expenses was mainly due to the improvement in our collection of accounts receivable in the first half of 2018.

The changes in the allowances for doubtful accounts during the six months ended June 30, 2018 and 2017 were as follows:

|  | For the Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Balance, Beginning of Period | $18,209,734 | $15,664,479 |
| Bad debt expense (benefit) | 352,681 | 725,052 |
| Foreign currency translation adjustment | -324,167 | 415,690 |
| Balance, End of Period | $18,238,248 | $16,805,221 |

21

### Loss from Operations

Our operating loss for the six months ended June 30, 2018 was $1.0 million, compared to an operating loss of $3.0 million in the same period in 2017.

### Net Interest Expense

Net interest expense for the six months ended June 30, 2018 was $0.2 million, compared to $0.3 million for the same period in 2017.

### Income Tax expense

Our income tax rate for our wholly owned subsidiary, Helpson, was 25% for each of the six months ended June 30, 2018 and 2017. Our income tax expense was $0.05 million for the six months ended June 30, 2018 and $0.06 million for the same period in2017. Helpson’s tax rate for 2018 and the foreseeable future will be 25%.

### Net Loss

Net Loss for the six months ended June 30, 2018 was $1.3 million, compared to net loss of $3.3 million in the same period a year ago. The decrease in net loss was mainly the result of increase in revenue and decreased expenses in the six months ended June 30, 2018.

For the six months ended June 30, 2018, loss per basic and diluted common share was $0.03, compared to loss per basic and diluted common share of $0.07 for the six months ended June 30, 2017.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 43,579,557 for each of the six months ended June 30, 2018 and 2017.

### Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations. Our cash and cash equivalents were $1.9 million, representing 3.3% of our total assets as of June 30, 2018, as compared to $2.0 million, representing 3.4% of our total assets as of December 31, 2017. All of the $1.9 million of cash and cash equivalents as of June 30, 2018 is considered to be reinvested indefinitely in our Chinese subsidiary, Helpson, and is not expected to be available for payment of dividends or 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 was RMB 80 million (approximately $13 million), which had been fully utilized through May 7, 2014. As of July 31, 2018, we have repaid RMB35 million (approximately $5.1 million) towards the principal of the construction loan per the repayment schedule. The current portion of the construction loan facility is $2.1 million as of June 30, 2018. 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 cash provided by operations will be sufficient to meet our working capital needs and our anticipated capital expenditures, including expenditures for consistency evaluation, and new formula acquisitions for the next twelve months. However, if circumstances change and we do not follow 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 provided by operating activities was $0.1 million in the six months ended June 30, 2018, compared to $0.8 million used by operating activities for the same period in 2017.

As of June 30, 2018, our net accounts receivable was $2.4 million, an increase of $0.1 million from $2.3 million as of December 31, 2017.

Total inventory was $6.4 million as of each of June 30, 2018 and December 31, 2017.

### Investing Activities

During the six months ended June 30, 2018, net cash used in investing activities was $0.03 million compared to $0.05 million for the six months ended June 30, 2017.

### Financing Activities

Cash flow used in financing activities was $0.2 million in the six months ended June 30, 2018, compared to $0.1 million in the six months ended June 30, 2017. The financing activities that occurred in the six months ended June 30, 2018 were primarily related to the scheduled payments of the construction loan facility described in the first paragraph of this section entitled “Liquidity and Capital Resources” and as discussed in Note 8 to the consolidated financial statements.

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’ 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, 2018 and December 31, 2017, the net assets of Helpson were $38,078,000 and $40,034,000, 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) as of June 30, 2018 and December 31, 2017, respectively. Since the amount that Helpson must set aside for the statutory surplus fund only accounts for 21.4% and 20.3%, 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, 2018.

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 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 June 30, 2018, we did not have any off-balance sheet arrangements.

### Commitments

As of June 30, 2018, we were obligated to pay laboratories and other service providers approximately $1.1 million over approximately the next four years upon completion of various phases of contracts required to obtain CFDA production approval for our 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, 2,517 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 not effective as of June 30, 2018 to satisfy the objectives for which they are intended due to the material weakness in our internal control over financial reporting with respect to our lack of accounting financial reporting personnel knowledgeable in U.S. GAAP as disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on April 2, 2018. Notwithstanding these material weakness, management has concluded that our 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.

Filed Aug 14, 2018.
Source: SEC EDGAR, the filing index for accession 0001213900-18-010992. Last ingested by Listed: Oct 30, 2026, 16:51 ET. No prices; not investment advice.