China Pharma Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2023

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

China Pharma Holding Inc. (“China Pharma”) is not a Chinese operating company but a Nevada holding company. All of our operations are conducted in the PRC through Hainan Helpson Medical & Biotechnology Co., Ltd (“Helpson”), our wholly owned subsidiary incorporated under the laws of the People’s Republic of China (the “PRC”), where our manufacturing facilities are located. China Pharma, collectively with Helpson, are referred to as “We”, “Our”, “Us”, or the “Company”. We are principally engaged in the development, manufacture and marketing of pharmaceutical products for human use in connection with a variety of high-incidence and high-mortality diseases and medical conditions prevalent in the PRC. We manufacture pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions. The majority of our pharmaceutical products are sold on a prescription basis and all of them have been approved for at least one or more therapeutic indications by the National Medical Products Administration (the “NMPA”, formerly China Food and Drug Administration, or CFDA) based upon demonstrated safety and efficacy.

China’s consistency evaluation of generic drugs continues to proceed in 2023. We have always taken the task of promoting the consistency evaluation as a top priority, and worked on them actively. However, for each drug’s consistency evaluation, due to the continuous dynamic changes of the detailed consistency evaluation policies, market trends, expected investments, and expected returns of investment (“ROI”), the whole industry, including us, has been making slow progresses in terms of the consistency evaluation. One of our flagship products, Candesartan tablets, a hypertension product, has passed generic-drug-consistency-evaluation in early August 2023.

Helpson has taken a more cautious and flexible attitude towards initiating and progressing any project for existing products’ consistency evaluation to cope with the changing macro environment of drug sales in China. In 2018, relevant Chinese authorities decided to implement trial Centralized Procurement (“CP”) activities in 11 selected pilot cities (including 4 municipalities and 7 other cities), since ) then, eight rounds of CP activities have been carried out as of June 30, 2023, which significantly reduced the price of the drugs that won the bids. In addition, the consistency evaluation has been adopted as one of the qualification standards for participating in the CP activities. As a result, Helpson needs to balance at least the two factors above (namely, the investment of financial resources and time to obtain the qualification of CP, and the sharp decline in the price of drugs included in CP) before making decisions for any products.

In addition, we continue to explore the field of comprehensive healthcare. Comprehensive healthcare is a general concept proposed by the Chinese government according to the development of the times, social needs and changes in disease spectrum. According to the Outline of “Healthy China 2030” issued by Chinese government in October 2016, the total size of China’s health service industry will reach RMB 16 trillion (approximately $2.5 trillion) by 2030. This industry focuses on people’s daily life, aging and diseases, pays attention to all kinds of risk factors and misunderstandings affecting health, calls for self-health management, and advocates the comprehensive care throughout the entire process of life. It covers all kinds of health-related information, products and services, as well as actions taken by various organizations to meet the health needs. In response to this trend, we launched Noni enzyme, a natural, Xeronine-rich antioxidant food supplement at the end of 2018. We also launched wash-free sanitizers and masks, in 2020, to address the market needs caused by COVID-19 in China. As Chinese government officially terminated its zero-case policy, now the responsibility to protect people from the impact of COVID-19 falls more to the citizens themselves, and masks and sanitizers have been more and more popular due to increasing demand. Helpson has sufficient production capacity for medical masks, surgical masks, KN95 masks, and N95 masks, which meets the personal needs for protection against the epidemic outbreak. Thanks to the green channel provided by Hainan Medical Products Administration, Helpson received the Registration Certificate of N95 medical protective mask at the fastest speed by the end of 2022, when the infection of COVID-19 had surged in China.

We will continue to optimize our product structure and actively respond to the current health needs of human beings.

Results of Operations for the three months ended June 30, 2023

Revenue

Revenue decreased by 31.9% to $1.1 million for the three months ended June 30, 2023, as compared to $1.6 million for the three months ended June 30, 2022. This decrease was mainly due to the phenomenon of drug hoarding in the first quarter of 2023 after the lifting up of COVID-19 control measures in China at the end of 2022. Therefore, the need for drug procurement decreased in the following second quarter of 2023.

Set forth below are our revenues by product category in millions (USD) for the three months ended June 30, 2023 and 2022:

The most significant revenue decrease in terms of dollar amount was in our “Anti-Viral/ Infection & Respiratory” product category, which generated $0.47 million in sales revenue in the three months ended June 30, 2023 compared to $0.69 million for the same period a year ago, a decrease of $0.22 million. This decrease was mainly due to the decrease in sales of Roxithromycin Dispersible Tablet because of the lower need in the second quarter due to the significant hoarding of drugs in the first quarter of 2023.

Our “CNS Cerebral & Cardio Vascular” product category sales decreased by $0.20 million to $0.35 million in the three months ended June 30, 2023 from $0.55 million for the same period in 2022, which was mainly due to the decrease in sales of Candesartan that was caused by market volatility.

Sales under “Other” product category generated $0.11 million in sales revenue in the three months ended June 30, 2023 compared to $0.27 million for the same period a year ago, which is a decrease of $0.16 million. This decrease was mainly due to the decrease in sales of Vitamin B6 for Injection, which was caused by market volatility.

Our “Digestive Diseases” product category generated $0.17 million of sales in the three months ended June 30, 2023, compared to $0.11 million in the same period in 2022. This increase was mainly due to the increase in sales of Omeprazole triggered by higher market demand after China lifting up epidemic control at the end of 2022.

For the three months ended June 30, 2023, revenue breakdown by product category showed certain changes to that of the same period in 2022. Sales of the “Anti-Viral/Infection & Respiratory” products category represented both 43% of total sales in the three months ended June 30, 2023 and 2022, respectively. The “CNS Cerebral & Cardio Vascular” product category represented 32% and 34% of total revenue in the three months ended June 30, 2023 and 2022, respectively. The “Other” product category represented 10% and 16% of revenues in the three months ended June 30, 2023 and 2022, respectively. The “Digestive Diseases” product category represented 15% and 7% of total revenue in the three months ended June 30, 2023 and 2022, respectively.

Cost of Revenue

For the three months ended June 30, 2023, our cost of revenue was $1.2 million, or 113.4% of total revenue, while cost of revenue was $1.8 million, or 114.2% of total revenue, for the same period in 2022.

Gross Loss and Gross Margin

Gross loss for the three months ended June 30, 2023 was $0.15 million, as compared to $0.23 million during the same period in 2022. For the three months ended June 30, 2023, we had a gross loss margin of 13.4% as compared to a gross loss margin of 14.2% during the same period in 2022.

Selling Expenses

Our selling expenses for the three months ended June 30, 2023 and 2022 were $0.17 million and $0.26 million, respectively. Selling expenses accounted for 15.5% of the total revenue for the three months ended June 30, 2023, as compared to 16.5% during the same period in 2022. As a result of the adjustment of many policies of healthcare reformation, we had reduced the number of personnel and expenses to efficiently support our sales and the collection of accounts receivable.

General and Administrative Expenses

Our general and administrative expenses were $0.11 million and $0.27 million for the three months ended June 30, 2023 and 2022, respectively. It accounted for 10.2% and 16.9% of our total revenues in the three months ended June 30, 2023 and 2022, respectively.

Research and Development Expenses

Our research and development expenses for the three months ended June 30, 2023 and 2022 were both $0.02 million, respectively. Research and development expenses accounted for 2.2% and 0.9% of our total revenues for the three months ended June 30, 2023 and 2022, respectively. These expenditures were mainly for the consistency evaluations of our existing products.

Bad Debt Expenses (Benefit)

Our bad debt expense for the three months ended June 30, 2023 were $4,047, as compared to bad debt benefit of $4,358 for the same period in 2022.

In general, our normal customer credit or payment terms are 180 days. This has not changed in recent years. Due to the peculiar environment affecting the Chinese pharmaceutical market, deferred payments to pharmaceutical companies by state-owned hospitals and local medicine distributors are common.

The amount of accounts receivable that was past due (or the amount of accounts receivable that was more than 180 days old) was $0.02 million and $0.03 million as of June 30, 2023 and December 31, 2022, respectively.

The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of June 30, 2023 and December 31, 2022:

Our bad debt allowance estimate practice is that we consider accounts receivable balances aged within 180 days current, except for any individual uncollectible account assessed by management. We account for the following respective percentage as bad debt allowance based on age of the accounts receivables: 10% of accounts receivable that is between 180 days and 365 days old, 70% of accounts receivable that is between 365 days and 720 days old, and 100% of accounts receivable that is greater than 720 days old.

We recognize bad debt expenses per actual write-offs as well as changes of allowance for doubtful accounts. To the extent that our current allowance for doubtful accounts is higher than that of the previous period, we recognize a bad debt expense for the difference during the current period, and when the current allowance is lower than that of the previous period, we recognize a bad debt credit for the difference. The allowance for doubtful account balances were $16.1 million and $16.7 million as of June 30, 2023 and December 31, 2022, respectively. The changes in the allowances for doubtful accounts during the three months ended June 30, 2023 and 2022 were as follows:

Loss from Operations

Our operating loss for the three months ended June 30, 2023 was $0.4 million, compared to an operating loss of $0.8 million during the same period in 2022.

Net Interest Expense

Net interest expense for the three months ended June 30, 2023 was $0.14 million, as compared to $0.11 million for the same period in 2022.

Net Loss

Net loss for the three months ended June 30, 2023 was $0.6 million, as compared to a net loss of $0.9 million for the same period a year ago. The decrease in net loss was mainly the result of decreased cost and expenses in this period.

Loss per basic and diluted common share were $0.06 for the three months ended June 30, 2023 and $0.18 for the same period in 2022.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share were 9,916,180 and 4,848,867 for the three months ended June 30, 2023 and 2022.

Results of operations for the six months ended June 30, 2023

Revenue

Revenue was $3.1 million and $3.2 million for the six months ended June 30, 2023 and 2022, respectively.

Set forth below are our revenues by product category in millions (USD) for the six months ended June 30, 2023 and 2022, respectively:

The most significant revenue decrease in terms of dollar amount was our “Anti-Viral/ Infection & Respiratory” product category, which generated $1.47 million in sales revenue in the six months ended June 30, 2023 compared to $1.74 million in the same period a year ago, represented a decrease of $0.27 million that was mainly caused by the decrease in sales of Roxithromycin Dispersible Tablet as our such product is not yet eligible to participate in the national procurement).

Sales of our “CNS Cerebral & Cardio Vascular” was $0.75 million in sales revenue in the six months ended June 30, 2023, compared to $0.849 million in the same period a year ago, which represented a decrease of $0.09 million. This decrease was mainly due to sales decrease of Ozagrel Sodium for Injection caused by market volatility.

Sales of “Others” product category generated $0.47 million in sales revenue in each of the six months ended June 30, 2023 and 2022, respectively.

Sales of our “Digestive Diseases” product category generated $0.37 million in the six months ended June 30, 2023, and $0.17 million in the six months ended June 30, 2022. This increase was mainly due to the increase in sales of Omeprazole triggered by higher market demand after China lifting up epidemic control at the end of 2022.

For the six months ended June 30, 2023, revenue breakdown by product category remained similar to that of the same period in 2022. The “Anti-Viral/Infection & Respiratory” products category represented 48% and 54% of total revenues in the six months ended June 30, 2023 and 2022. The “CNS Cerebral & Cardio Vascular” category represented 25% and 26% of total revenue in the six months ended June 30, 2023 and 2022, respectively. The “Others” category represented 15% of revenues in both the six months ended June 30, 2023 and 2022, respectively. And the “Digestive Diseases” category represented 12% and 5% of total revenue in the six months ended June 30, 2023 and 2022, respectively.

Cost of Revenue

For the six months ended June 30, 2023, our cost of revenue was $3.0 million, or 99.0% of total revenue, comparing to $3.6 million, or 112.4% of total revenue, in the same period in 2022. The decrease in proportion to cost of revenue in this period was mainly due to the fact that the price of our certain products increased in this period.

Gross Profit (Loss) and Gross Margin

Gross profit for the six months ended June 30, 2023 was $0.03 million, compared to gross loss of $0.4 million in the same period in 2022. Our gross profit margin in the six months ended June 30, 2023 was 1.0% compared to a gross loss margin of 12.4% in the same period in 2022. The improvement of gross margin in this period was mainly due to the decreased cost.

Selling Expenses

Our selling expenses for the six months ended June 30, 2023 and 2022 were $0.3 million and $0.4 million, respectively. Selling expenses accounted for 10.3% of the total revenue in the six months ended June 30, 2023 compared to 13.9% in the same period in 2022.

General and Administrative Expenses

Our general and administrative expenses for the six months ended June 30, 2023 were $0.5 million, as compared to $0.8 million in the same period in 2022. Our general and administrative expenses accounted for 17.3% and 24.5% of our total revenues in the six months ended June 30, 2023 and 2022, respectively.

Research and Development Expenses

Our research and development expenses for the six months ended June 30, 2023 and 2022 were $0.05 million and $0.07 million, respectively. The decrease in research and development costs is mainly due to the fact that most of the consistency evaluation of our key product, Candesartan, was completed last year.

Bad Debt Benefit

Our bad debt benefit was $5,989 for the six months ended June 30, 2023, and $9,879 for the six months ended June 30, 2022.

The changes in the allowances for doubtful accounts during the six months ended June 30, 2023 and 2022 were as follows:

Loss from Operations

Our operating loss for the six months ended June 30, 2023 was $0.9 million, compared to $1.7 million in the same period in 2022.

Net Interest Expense

Net interest expense for the six months ended June 30, 2023 was $0.22 million, compared to $0.23 million for the same period in 2022.

Net Loss

Net loss for the six months ended June 30, 2023 was $1.1 million, as compared to net loss of $1.9 million for the six months ended June 30, 2022. The decrease of net loss was mainly a result of decreased cost expenses in this period.

For the six months ended June 30, 2023, loss per basic and diluted common share was $0.12, compared to loss per basic and diluted common share of $0.40 for the six months ended June 30, 2022.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 9,002,559 for the six months ended June 30, 2023, and 4,793,149 for the six months ended June 30, 2022.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations, bank lines of credit and the Convertible Note Payable. Currently the Company has not witnessed or expected to encounter any difficulties to refinance those lines of credit this year. As of June 30, 2023, the aggregated advance from our CEO was $1,095,956 for use in operations. Our cash and cash equivalents were $0.9 million, representing 5.7% of our total assets, as of June 30, 2023, as compared to $2.0 million, representing 11.4% of our total assets as of December 31, 2022. All of the $0.9 million of cash and cash equivalents as of June 30, 2023 are considered to be reinvested indefinitely in the Company’s Chinese subsidiary, Helpson and are not expected to be available for payment of dividends or for other payments to its parent company or to its shareholders.

The Company obtained various lines of credit in details described under Note 7 to its unaudited condensed consolidated financial statements contained in this report which is incorporated by reference herein.

China Pharma issued a convertible note to an institutional accredited investor as disclosed in Note 8 to the condensed consolidated financial statements contained in this report which is incorporated by reference herein.

Although the Company obtained additional lines of credit in 2022, there can be no assurance that the Company will be able to achieve its future strategic goal to accelerate the launch of nutrition products. This raises substantial doubt about the Company’s ability to continue as a going concern. Although our Chairperson and Chief Executive Officer had advanced funds for working capital in 2022, there can be no assurances that this will be the case in the future. We may seek additional debt or equity financing as necessary when we believe the market conditions are the most advantageous to us and/or require us to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. There can be no assurance that any additional financing will be available on acceptable terms, if at all.

Operating Activities

Net cash used by operating activities was $1.7 million for the six months ended June 30, 2023, compared to $1.2 million in the same period in 2022.

As of June 30, 2023, our net accounts receivable was $0.3 million, compared to $0.4 million as of December 31, 2022.

Total inventory was $3.9 million and $2.9 million as of June 30, 2023 and December 31, 2022, respectively.

Investing Activities

There was $60,465 provided by investing activities during the six months ended June 30, 2023, compared to $176,682 used in investing activities for the same period in 2022.

Financing Activities

Cash flow provided by financing activities was $0.52 million in the six months ended June 30, 2023; compared to cash flow used in financing activities of $1.13 million for the same period in 2022.

According to relevant PRC laws, companies registered in the PRC, including our PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of their after-tax net income, as determined under the accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach fifty percent (50%) of the companies’ registered capital prior to their remittance of funds out of the PRC. Allocations to these reserves and funds can only be used for specific purposes and are not transferrable to the parent company in the form of loans, advances or cash dividends. As of June 30, 2023 and December 31, 2022, Helpson’s net assets totaled ($1,164,000) and $(190,000), respectively. Due to the restriction on dividend distribution to overseas shareholders, the amount of Helpson’s net assets that was designated for general and statutory capital reserves, and thus could not be transferred to our parent company as cash dividends, was 50% of Helpson’s registered capital, which was both $8,145,000 as of June 30, 2023 and December 31, 2022, respectively. The amount that Helpson must set aside for the statutory surplus fund accounts exceeds its total net assets at June 30, 2023 and December 31, 2022. There were no allocations to the statutory surplus reserve accounts during the six months ended June 30, 2023.

The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. Our businesses and assets are primarily denominated in RMB. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires the submission of a payment application form together with certain invoices and executed contracts. The currency exchange control procedures imposed by Chinese government authorities may restrict Helpson, our Chinese subsidiary, from transferring its net assets to our parent company through loans, advances or cash dividends.

Off-Balance Sheet Arrangements

As of June 30, 2023, we did not have any off-balance sheet arrangements.

Critical Accounting Policies

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. The discussion of our critical accounting policies contained in Note 1 to our consolidated financial statements, “Organization and Significant Accounting Policies”, is incorporated herein by reference.

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.

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, 2023 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, 2022, filed with the SEC on March 30, 2023. Notwithstanding the aforementioned material weakness, management has concluded that our condensed consolidated financial statements included in this report are fairly stated in all material respects in accordance with U.S. GAAP for each period presented herein.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.