# China Pharma Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2019

- Company: [China Pharma Holdings, Inc.](/companies/cphi.md) (CIK 1106644)
- Form: 10-Q
- Filed: 2019-08-14
- Accepted by EDGAR: Aug 14, 2019, 16:06 ET
- Period: 2019-06-30
- Accession: 0001213900-19-015792
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1106644/000121390019015792/f10q0619_chinapharmaholdings.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1106644/000121390019015792/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $2.6m | us-gaap:Revenues |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $5.5m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2019-04-01 to 2019-06-30 | $2.4m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2019-01-01 to 2019-06-30 | $4.7m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2019-04-01 to 2019-06-30 | $163.5k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2019-01-01 to 2019-06-30 | $820.1k | us-gaap:GrossProfit |
| Research and development | 3 months, 2019-04-01 to 2019-06-30 | $66.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2019-01-01 to 2019-06-30 | $135.9k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | −$753.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-01-01 to 2019-06-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $97.3k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-01-01 to 2019-06-30 | $184.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | −$838.1k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | −$1.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | −$0.02 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | −$0.03 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2019-01-01 to 2019-06-30 | $931.8k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $73.5k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-06-30 | $1.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $7.7m | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $43.0m | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $9.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-06-30 | $14.1m | us-gaap:Liabilities |
| Long-term debt | at 2019-06-30 | $6.4m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2019-06-30 | $29.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,138 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,” 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 continue to feel sustained pressure from the heightened requirements of drug registration standards, consistency evaluations, and the rising costs of clinical trials in the second quarter of 2019. At the same time, the improvement of environmental protection tax law, air, water and soil pollution control standards and the strengthening of supervision bring about the increase of environmental protection costs. In this context, the shortage of Active Pharmaceutical Ingredients (APIs) and intermediates leads to the increase of raw materials costs.

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 defined the objectives of evaluations, establish deadlines, determine selection criteria for reference drugs, call for a rational selection of evaluation methods, identify pharmaceutical manufacturers as the principle generic drug consistency evaluation, and set forth corresponding incentives. Subsequently, in May of 2016, the China Food and Drug Administration (the “CFDA”) issued “*Comments from the General Office of the State Council on the Consistency Evaluations of the Efficacy and Quality of Generic Drugs”*, which further elaborated on assessment processes and related technical rules. Consistency evaluations apply to the majority of our current existing marketed and pipeline products. In this environment, based on the management team’s assessment of each pipeline product based on (i) the adjusted CFDA approval criteria and clinical trial requirements, (ii) the estimated additional investment needed for consistency evaluation and (iii) the potential return on investment for such pipeline product once launched into the market, the management team decided to terminate the progress of certain pipeline products. Complying with consistency evaluations has and will become our core task in the near future and will therefore significantly impact our operations as well as our industrial structure.

In order to support our existing products package we remain focused on development of our pipeline products. 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, 2019 remains the same as we have reported in our Annual Report on Form 10-K filed with the SEC on March 28, 2019.

Market Trends

Consumer demand for medicine is relatively stable and is generally unaffected by seasonal business cycles. However, we have noticed that the growth rate of the pharmaceutical manufacturing industry has been higher than GDP growth rates in China. According to the data released by the State Council of China, the national budget for health care in 2018 was RMB1,529 billion, which represented an increase of RMB84 billion over the previous year, an increase of 2.5% over that of the national financial expenditure, and accounting for 7.3% of the entire national financial expenditure. On top of that, from 2013 to 2017, the cumulative expenditure on medical and health care in China totaled RMB5,950 billion, which represented an average annual increase of 11.7%, and 2% higher than that of the national financial expenditure in the same period.

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, the increases in medical expenditures per capita, the aging population, and the 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 reducing 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 health-care insurance system, we believe that the hygiene spending proportion of total fiscal expenditures 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, in conjunction with consistency evaluations, could allow us to meet European and American production standards, enabling us to export our products to overseas markets.

In general, 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 will 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 existing 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, 2019

#### Revenue

Revenue decreased by 19.0% to $2.6 million for the three months ended June 30, 2019, as compared to $3.2 million for the three months ended June 30, 2018. This decrease was mainly due to the market reaction caused by the strict implementation of the policy on controlling the percentage of spending on medicines to patients’ total expenditure in hospitals.

Set forth below are our revenues by product category in millions (USD) for the three months ended June 30, 2019 and 2018:

| Product Category | Three Months Ended June 30, 2019 | 2018 | Net Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 0.62 | 0.74 | -0.12 | -16% |
| Anti-Viral/ Infection & Respiratory | 1.46 | 1.47 | -0.01 | -1% |
| Digestive Diseases | 0.12 | 0.25 | -0.13 | -52% |
| Other | 0.40 | 0.72 | -0.32 | -44% |

The most significant revenue decrease in terms of dollar amount was in our “Others” product category, which generated $0.40 million in sales revenue in the three months ended June 30, 2019 compared to $0.72 million for the same period a year ago, which is a decrease of $0.32 million. This decrease was mainly due to the decrease in sales of Vitamin B6.

Our “Digestive Diseases” product category sales also decreased by $0.13 million to $0.12 million in the three months ended June 30, 2019 from $0.25 million for the same period in 2018, which was mainly due to the decrease in sales of Omeprazole.

Sales in the “CNS Cerebral & Cardio Vascular” product category decreased to $0.62 million in the three months ended June 30, 2019, as compared to $0.74 million for the same period in 2018. Our “Anti-Viral/ Infection & Respiratory” product category generated $1.46 million and $1.47 million of sales in the three months ended June 30, 2019 and 2018, respectively.

| Product Category | Three Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 24% | 23% |
| Anti-Viral/ Infection & Respiratory | 56% | 46% |
| Digestive Diseases | 5% | 8% |
| Other | 15% | 23% |

For the three months ended June 30, 2019, revenue breakdown by product category showed a few changes to that of the same period in 2018. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 56% and 46% of total sales in the three months ended June 30, 2019 and 2018, respectively. The “CNS Cerebral & Cardio Vascular” product category represented 24% and 23% of total revenue in the three months ended June 30, 2019 and 2018, respectively. The “Digestive Diseases” product category represented 5% and 8% of total revenue in the three months ended June 30, 2019 and 2018, respectively. The “Other” product category represented 15% and 23% of revenues in 2019 and 2018, respectively.

#### Cost of Revenue

For the three months ended June 30, 2019, our cost of revenue was $2.4 million, or 94% of total revenue, while cost of revenue was $2.6 million, or 82% of total revenue, for the same period in 2018. The decrease in cost of revenue was mainly due to the decrease in sales. However, the percentage of cost to revenue increased in this period, which was mainly due to the stable nature of fixed cost.

#### Gross Profit and Gross Margin

Gross profit for the three months ended June 30, 2019 was $0.2 million, as compared to $0.6 million during the same period in 2018. Our gross profit margin in the three months ended June 30, 2019 was 6.4% as compared to 18.3% during the same period in 2018. The decrease in our gross profit margin was mainly due to the decrease in revenue and the increased ratio of fixed cost to revenue.

#### Selling Expenses

Our selling expenses for the three months ended June 30, 2019 and 2018 were $0.5 million and $0.7 million, respectively. Selling expenses accounted for 19.7% of the total revenue in the three months ended June 30, 2019, as compared to 22.6% during the same period in 2018. Because of adjustments in our sales practices, and reform of healthcare policies, we reduced 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 for the three months ended June 30, 2019 were $0.3 million, as compared to $0.4 million for the same period in 2018. General and administrative expenses accounted for 13.0% and 11.1% of our total revenues in the three months ended June 30, 2019 and 2018, respectively.

#### Research and Development Expenses

Our research and development expenses for the three months ended June 30, 2019 were $0.07 million, as compared to $0.02 million in the same period in 2018. Research and development expenses accounted for 2.6% and 0.7% of our total revenues in the three months ended June 30, 2019 and 2018, respectively. The consistency evaluations discussed under the “Business Overview & Recent Developments” section hereof is expected to have a significant impact on all generic products not only in our pipeline, but also throughout the existing Chinese market for similar generic products. Because of the continuous introduction of detailed implementation rules under this policy, our pipeline products did not experience any further development in the second quarter of 2019.

#### Bad Debt Expenses

Our bad debt expenses for the three months ended June 30, 2019 was $10,092, as compared to $350,847 for the same period in 2018.

We increased our customer credit or payment terms from 90 days to 180 days in the fourth quarter of 2018 in order to better reflect our actual operating environment. Due to the peculiar circumstances affecting the Chinese pharmaceutical market, 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 accounts receivable that were past due (or the amount of accounts receivable that were more than 180 days old) was $0.15 million and $0.22 million as of June 30, 2019 and December 31, 2018, respectively.

The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of June 30, 2019 and December 31, 2018:

|  | June 30, 2019 | December 31, 2018 |
| --- | ---: | ---: |
| 1 - 180 Days | 2.9% | 3.8% |
| 180 - 360 Days | 0.7% | 1.2% |
| 360 - 720 Days | 0.5% | 0.3% |
| \> 720 Days | 95.9% | 94.7% |
| Total | 100.0% | 100.0% |

In the fourth quarter of 2018, our bad debt allowance estimate was updated to a policy which requires no allowance of accounts receivable recognized that are within 180 days old, 10% of accounts receivable that are between 180 days and 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. Prior to that, our policy was no allowance of accounts receivable recognized that are within 90 days old, 10% of accounts receivable that are between 90 days and 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 both $17.8 million as of June 30, 2019 and December 31, 2018, respectively. The changes in the allowances for doubtful accounts during the three months ended June 30, 2019 and 2018 were as follows:

|  | For the Three Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Balance, Beginning of Period | $18,295,892 | $18,865,079 |
| Bad debt expense | 10,092 | 350,847 |
| Foreign currency translation adjustment | (468,970) | (977,678) |
| Balance, End of Period | $17,837,014 | $18,238,248 |

#### Loss from Operations

Our operating loss for the three months ended June 30, 2019 was $0.8 million, compared to an operating loss of $0.9 million during the same period in 2018.

#### Net Interest Expense

Net interest expense for the three months ended June 30, 2019 and 2018 was $0.09 million and $0.12 million, respectively.

#### Income Tax expense

Our income tax rate for our wholly owned subsidiary, Hainan Helpson Medical & Biotechnology Co., Ltd.(“Helpson”) was 25% for both the three months ended June 30, 2019 and 2018. We did not have any income tax expense for the three months ended June 30, 2019, while the income tax expense was $0.02 million for the three months ended June 30, 2018. Helpson’s tax rate for 2019 was 25% and will remain at this rate for the foreseeable future.

#### Net Loss

Net loss for the three months ended June 30, 2019 was $0.8 million, as compared to a net loss of $1.0 million for the same period a year ago. The decrease in net loss was mainly the result of controls on expenditures outweighed the impact of decrease in revenue.

For the three months ended June 30, 2019 and 2018, loss per basic and diluted common share were both $0.02.

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 June 30, 2019 and 2018.

### Results of Operations for the Six Months Ended June 30, 2019

### Revenue

Revenue decreased by 19.0% to $5.5 million for the six months ended June 30, 2019, as compared to $6.8 million for the six months ended June 30, 2018. This decrease was mainly due to the implementation of government policies on “controlling the percentage of medicine spending on total hospital expenditure” in recent quarters.

Set forth below are our revenues by product category in millions (USD) for the six months ended June 30, 2019 and 2018, respectively:

| Product Category | Six Months Ended June 30, 2019 | 2018 | Net Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 1.07 | 1.25 | -0.18 | -14% |
| Anti-Viral/ Infection & Respiratory | 3.32 | 3.81 | -0.49 | -13% |
| Digestive Diseases | 0.23 | 0.42 | -0.19 | -45% |
| Other | 0.90 | 1.31 | -0.41 | -31% |

The most significant revenue decrease in terms of dollar amount was in our “Anti-Viral/ Infection & Respiratory”, which generated $3.32 million in sales revenue in the six months ended June 30, 2019 compared to $3.81 million in the same period a year ago, a decrease of $0.49 million. This decrease was mainly due to sales decrease of Cefaclor.

Sales of our “Other” product category, which generated $0.90 million in sales revenue in the six months ended June 30, 2019 compared to $1.31 million in the same period a year ago, represented a decrease of $0.41 million.

Sales of our Digestive Diseases category also decreased by $0.19 million to $0.23 million in the six months ended June 30, 2019 from $0.42 million in the same period in 2018, mainly due to the decrease in sales of Omeprazole.

“CNS Cerebral & Cardio Vascular” category, which generated $1.07 million in sales revenue in the six months ended June 30, 2019 compared to $1.25 million in the same period a year ago, a decrease of $0.18 million. This decrease was mainly due to sales decrease of Gastrodin.

| Product Category | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| CNS Cerebral & Cardio Vascular | 20% | 19% |
| Anti-Viral/ Infection & Respiratory | 60% | 56% |
| Digestive Diseases | 4% | 6% |
| Other | 16% | 19% |

For the six months ended June 30, 2019, revenue breakdown by product category showed certain changes compared to that of the same period in 2018. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 60% and 56% of total sales in the six months ended June 30, 2019 and 2018, respectively. The “CNS Cerebral & Cardio Vascular” category represented 20% and 19% of total revenue in the six months ended June 30, 2019 and 2018, respectively. The “Digestive Diseases” category represented 4% and 6% of total revenue in the six months ended June 30, 2019 and 2018, respectively. And the “Other” category represented 16% and 19% of revenues in the six months ended June 30, 2019 and 2018, respectively.

### Cost of Revenue

For the six months ended June 30, 2019, our cost of revenue was $4.7 million, or 85% of total revenue, while cost of revenue was $5.2 million, or 76% of total revenue, in the same period in 2018. The decrease in cost of revenue was mainly due to the decrease in sales. However, the percentage of cost to revenue increased in this period, which was mainly due to the stable nature of fixed cost.

### Gross Profit and Gross Margin

Gross profit for the six months ended June 30, 2019 was $0.8 million, compared to $1.6 million in the same period in 2018. Our gross profit margin in the six months ended June 30, 2019 was 14.9% compared to 24.1% in the same period in 2018. The decrease in our gross profit margin was mainly due to the decrease in sales in the first half of 2019. Although cost decreased in this period as well, the stable nature of fixed cost deteriorates the gross margin when the decrease in revenue outweighed that of cost.

### Selling Expenses

Our selling expenses for the six months ended June 30, 2019 and 2018 were $1.0 million and $1.4 million, respectively. Selling expenses accounted for 17.9% of the total revenue in the six months ended June 30, 2019 compared to 20.5% in the same period in 2018.

### General and Administrative Expenses

Our general and administrative expenses for the six months ended June 30, 2019 were $0.76 million, which represented a decrease of $0.08 million compared to $0.85 million in the same period in 2018. General and administrative expenses accounted for 13.9% and 12.4% of our total revenues in the six months ended June 30, 2019 and 2018, respectively.

### Research and Development Expenses

Our research and development expenses for the six months ended June 30, 2019 and 2018 were $0.14 million and $0.05 million, respectively, representing an increase of $0.09 million compared to the same period of last year. The increase in our research and development expenses was mainly due to the spending on consistency evaluations of our current existing products. 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 products, but also throughout the existing Chinese market. Because of the continuous introduction of detailed implementation rules under this policy, our pipeline products did not have any further development in the first half in 2019.

### Bad Debt Expenses

Our bad debt expenses for the six months ended June 30, 2019 was $0.02 million, which represented a decrease of $0.33 million compared to $0.35 million in the same period in 2018. The decrease in our bad debt expenses was mainly due to the improvement in our collection of accounts receivable in the first half of 2019.

The changes in the allowances for doubtful accounts during the six months ended June 30, 2019 and 2018 were as follows:

|  | For the Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Balance, Beginning of Period | $17,815,075 | $18,209,734 |
| Bad debt expense | 23,404 | 352,681 |
| Foreign currency translation adjustment | (1,465) | (324,167) |
| Balance, End of Period | $17,837,014 | $18,238,248 |

### Loss from Operations

Our operating loss for the six months ended June 30, 2019 was $1.1 million, compared to an operating loss of $1.0 million in the same period in 2018.

### Net Interest Expense

Net interest expense for the six months ended June 30, 2019 was $0.17 million, compared to $0.25 million for the same period in 2018.

### Income Tax expense

Our income tax rate for our wholly owned subsidiary, Helpson, was 25% for each of the six months ended June 30, 2019 and 2018. We did not have any income tax expense for the six months ended June 30, 2019. And there was $0.05 million income tax expense for the same period in 2018. Helpson’s tax rate for 2019 and the foreseeable future will be 25%.

### Net Loss

Net loss for the six months ended both June 30, 2019 and 2018 was $1.3 million. This reflected the offset of decreased revenue to decreased expenses in the six months ended June 30, 2019.

For the six months ended June 30, 2019, loss per basic and diluted common share was $0.03, compared to loss per basic and diluted common share of $0.03 for the six months ended June 30, 2018.

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, 2019 and 2018.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations. Our cash and cash equivalents were $1.7 million, representing 3.8% of our total assets, as of June 30, 2019, as compared to $1.2 million, representing 2.6% of our total assets as of December 31, 2018. All of the $1.7 million of cash and cash equivalents as of June 30, 2019, is considered to be reinvested indefinitely in the Company’s Chinese subsidiary, Helpson and is not expected to be available for payment of dividends or for other payments to its parent company or to its shareholders. We entered into an eight-year construction loan facility on September 21, 2013. The total construction loan facility amount was RMB80 million (approximately $11.7 million), which had been fully utilized through May 7, 2014. The construction loan installments to be repaid within the next 12 months are about $2.2 million as of June 30, 2019. On July 10, 2019, we repaid such principal and accumulatively repaid the principal of RMB 50 million (approximately $7.2 million) of the construction loans, per the payback schedule. Cash flow generated from operating activities was used to fund our daily operating expenses as well as the 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 evaluations 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, which may include debt and/or equity financing when we believe market conditions are most advantageous. Our Chairperson and Chief Executive Officer had advanced $278,696 for working capital at December 31, 2018. We have repaid $230,696 to the Chairperson in the first half of 2019. In July 2019, our Chairperson, Chief Executive Officer and Interim Chief Financial Officer advanced cash to us of RMB 4.77 million (about US$ 0.69 million) for the construction loan repayment. There can be no assurances that any additional advances of this nature will occur in the future. Nor can there be any assurance that any additional financing will be available on acceptable terms, if at all.

#### Operating Activities

Net cash provided by operating activities was $0.9 million in the six months ended June 30, 2019, as compared to $0.1 million for the same period in 2018.

As of June 30, 2019, our net accounts receivable were $0.7 million, as compared to $0.9 million, as of December 31, 2018.

Total inventory was $4.4 million, as of June 30, 2019, and $5.1 million as of December 31, 2018.

#### Investing Activities

During the six months ended June 30, 2019, net cash used in investing activities was $0.07 million as compared to $0.03 million for the six months ended June 30, 2018.

Financing Activities

Cash flow used in financing activities was $0.4 million in the six months ended June 30, 2019, as compared to $0.2 million in the six months ended June 30, 2018. The financing activities that occurred in the six months ended June 30, 2019 were primarily payments to related party payables, 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 condensed consolidated financial statements.

According to the relevant laws of the People’s Republic of China (the “PRC”), 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, 2019 and December 31, 2018, Helpson’s net assets totaled $26,577,000 and $27,485,000, 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 $8,145,000 and $8,145,000 (50% of registered capital) as of June 30, 2019 and December 31, 2018, respectively. Since the amount that Helpson must set aside for the statutory surplus fund only accounts for 30.6% and 29.6%, 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, 2019.

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, 2019, we did not have any off-balance sheet arrangements.

Commitments

As of June 30, 2019, we were obligated to pay laboratories and other service providers approximately $0.30 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 accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies that 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, 2,554 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, 2019 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, 2018, filed with the SEC on March 28, 2019. Notwithstanding the aforementioned 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, 2019.
Source: SEC EDGAR, the filing index for accession 0001213900-19-015792. Last ingested by Listed: Oct 30, 2026, 16:51 ET. No prices; not investment advice.