China Pharma Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2024

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 the manufacturing facilities are located. Helpson is principally engaged in the development, manufacture and marketing of pharmaceutical products for human use in connection with a variety of high-incidence and high-mortality diseases and medical conditions prevalent in the PRC. It manufactures pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions. The majority of its pharmaceutical products are sold on a prescription basis and all 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 2024. Helpson has 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 Helpson, has been making slow progresses in terms of the consistency evaluation. One of the 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, nine rounds of CP activities have been carried out as of August 6, 2024, 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 between the market access brought by CP, 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 regarding CP for any products.

In addition, Helpson continues 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 is expected to 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, Helpson launched Noni enzyme, a natural, Xeronine-rich antioxidant food supplement at the end of 2018. It 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 popular since COVID-19. Helpson has sufficient production capacity for medical masks, surgical masks, KN95 masks, and N95 masks, which also meets the personal needs for protection against other respiratory infectious disease. Helpson’s N95 medical protective mask has received registration certificate at the end of 2022 and right now has been selling in the mainland China nationwide.

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

Results of Operations for the three months ended June 30, 2024

Revenue

Revenue decreased by 16.4% to $0.9 million for the three months ended June 30, 2024, as compared to $1.1 million for the three months ended June 30, 2023. This decline was mainly due to an increasing number of drugs from other medicine providers being included in national CP, while Helpson’s peer products have not passed consistency evaluation. As a result, they are not qualified to participate in CP, the resulting sales has decreased.

Set forth below are our revenues by product category in millions (USD) for the three months ended June 30, 2024 and 2023:

The most significant revenue decrease in terms of dollar amount was in our “Digestive” product category, which generated $0.04 million in sales revenue in the three months ended June 30, 2024 compared to $0.17 million for the same period a year ago, a decrease of $0.13 million. This decrease was mainly due to the decrease in sales of Omeprazole because of the implementation of CP.

Our “Other” product category sales decreased by $0.08 million to $0.03 million in the three months ended June 30, 2024 from $0.11 million for the same period in 2023, which was mainly due to the decrease in sales of Vitamin B6 for Injection that was caused by the implementation of CP.

Sales under “CNS Cerebral & Cardio Vascular” product category generated $0.37 million in sales revenue in the three months ended June 30, 2024 compared to $0.35 million for the same period a year ago, which is an increase of $0.02 million. This slight change in sales was caused by market volatility.

Our “Anti-Viral/ Infection & Respiratory” product category generated $0.48 million of sales in the three months ended June 30, 2024, compared to $0.47 million in the same period in 2023. This slight change in sales was caused by market volatility.

For the three months ended June 30, 2024, revenue breakdown by product category showed certain changes to that of the same period in 2023. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 52% and 43% of total sales in the three months ended June 30, 2024 and 2023, respectively. The “CNS Cerebral & Cardio Vascular” product category represented 41% and 32% of total revenue in the three months ended June 30, 2024 and 2023, respectively. The “Other” product category represented 3% and 10% of revenues in the three months ended June 30, 2024 and 2023, respectively. The “Digestive Diseases” product category represented 4% and 15% of total revenue in the three months ended June 30, 2024 and 2023, respectively.

Cost of Revenue

For the three months ended June 30, 2024, our cost of revenue was $1.9 million, or 209.8% of total revenue, while cost of revenue was $1.2 million, or 113.4% of total revenue, for the same period in 2023. The increase in cost in this quarter was mainly because the increase in idle equipment costs due to reduced production, as well as the increased inventory impairments.

Gross Loss and Gross Margin

Gross loss for the three months ended June 30, 2024 was $1.01 million, as compared to $0.15 million during the same period in 2023. For the three months ended June 30, 2024, we had a gross loss margin of 109.8% as compared to a gross loss margin of 13.4% during the same period in 2023. The increase in gross loss is triggered by the decrease in the revenue and increase in the cost of revenue as described above.

Selling Expenses

Our selling expenses for the three months ended June 30, 2024 and 2023 were $0.11 million and $0.17 million, respectively. Selling expenses accounted for 12.0% of the total revenue for the three months ended June 30, 2024, as compared to 15.5% during the same period in 2023. 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 $0.09 million and $0.11 million for the three months ended June 30, 2024 and 2023, respectively. It accounted for 9.9% and 10.2% of our total revenues in the three months ended June 30, 2024 and 2023, respectively.

Research and Development Expenses

Our research and development expenses for the three months ended June 30, 2024 and 2023 were $0.16 and $0.02 million, respectively. Research and development expenses accounted for 17.8% and 2.2% of our total revenues for the three months ended June 30, 2024 and 2023, respectively. The increase in research and development expenses were mainly due to our increased efforts in drug consistency evaluation.

Bad Debt Expenses

Our bad debt expense for the three months ended June 30, 2024 were $8,476, as compared to $4,047 for the same period in 2023.

In general, our normal customer credit or payment terms are 180 days. This has not changed in recent years. Such relatively long credit term is due to the peculiar environment affecting the Chinese pharmaceutical market, as deferred payments by state-owned hospitals to local drug distributors are common, and their deferred payments will indirectly delay the payments from our customers to us. Due to the timeliness requirements of the NMPA for logistics of drug sales, Helpson, like most other pharmaceutical companies in China, sells substantially all the drugs to local drug distributors, certified by GSP (Good Supply Practice), the standard of products supply, which is a standard protocol to control the quality of the products during circulation. These GSP certified distributors then sell the drugs to state-owned hospitals. The GSP certified distributors’ payments to us are usually delayed as they will pay us after they receive payment from the state-owned hospitals. Therefore, as most of our customers are GSP certified distributors, we adopt a unified policy for bad debt allowance reserves for GMP’s customers who are typically GSP certified distributors. As is typical in the Chinese pharmaceutical market, there are no written contracts between the Company and any of its GSP certified distributors requesting the distributors to pay the Company’s account receivable upon their receipt of funds from the distributors’ customers, or state-owned hospitals. Nevertheless, the Company’s customers typically process the payment of the account receivable to the Company upon their receipt of payment from their customers, i.e., the state-owned hospitals, as a matter of implied consensus or industry standard. In the event the length of collection term is deviated from any of the past pattern of any particular customer, the Company will adjust its credit term.

The amount of accounts receivable that was past due (or the amount of accounts receivable that was more than 180 days old) was $0.06 million and $0.02 million as of June 30, 2024 and December 31, 2023, respectively.

The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable, respective gross accounts receivables as well as the allocated allowance for doubtful accounts as of June 30, 2024 and December 31, 2023:

21

Our allowance for doubtful accounts as a percentage of accounts receivable was 98.2% and 96.5% as of June 30, 2024 and December 31, 2023, respectively.

We conduct analysis and review on accounts receivables for customers on a specific, per-customer basis in the fourth fiscal quarter of each fiscal year. For customers (i) whose business license has been cancelled or expired; (ii) whose key business certificates such as GSP (Good Supply Practice) license have been invalid or revoked; (iii) who have no ability to continue operations, or (iv) who are encountering other issues that lead to accounts receivable unrecoverable, the receivable will be written-off as per the resolution of our Board of Directors.

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 $13.7 million and $13.8 million as of June 30, 2024 and December 31, 2023, respectively. The changes in the allowances for doubtful accounts during the three months ended June 30, 2024 and 2023 were as follows:

Loss from Operations

Our operating loss for the three months ended June 30, 2024 was $1.4 million, compared to an operating loss of $0.5 million during the same period in 2023. The increase in loss from operation is triggered by the decrease in the revenue and increase in the cost of revenue as described above.

Net Interest Expense

Net interest expense for the three months ended June 30, 2024 was $0.05 million, as compared to $0.14 million for the same period in 2023.

Net Loss

Net Loss for the three months ended June 30, 2024 was $1.4 million, as compared to a net loss of $0.6 million for the same period a year ago. The increase in net loss was mainly the result of increased cost in this period.

Loss per basic and diluted common share were $0.09 for the three months ended June 30, 2024 and $0.35 for the same period in 2023.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share were 16,124,241 and 1,689,985 for the three months ended June 30, 2024 and 2023.

Results of operations for the six months ended June 30, 2024

Revenue

Revenue decreased by 25.0% to $2.3 million for the six months ended June 30, 2024, as compared to $3.1 million for the six months ended June 30, 2023. This decline was mainly due to an increasing number of drugs from other medicine providers being included in national CP, while Helpson’s peer products have not passed consistency evaluation. As a result, they are not qualified to participate in CP, the resulting sales has decreased.

Set forth below are our revenues by product category in millions (USD) for the six months ended June 30, 2024 and 2023, respectively:

The most significant revenue decrease in terms of dollar amount was our “Other” product category, which generated $0.11 million in sales revenue in the six months ended June 30, 2024 compared to $0.47 million in the same period a year ago, represented a decrease of $0.36 million that was mainly caused by the decrease in sales of Vitamin B6 for Injection as our such product is not yet eligible to participate in CP.

Sales of our “Digestive Diseases” was $0.08 million in sales revenue in the six months ended June 30, 2024, compared to $0.37 million in the same period a year ago, which represented a decrease of $0.29 million. This decrease was mainly due to sales decrease of Helpson’s Omeprazole products due to ineligibility to participate in CP.

Sales of “CNS Cerebral & Cardio Vascular” product category generated $0.70 million in sales revenue in the six months ended June 30, 2024, compared to $0.75 million in the same period a year ago, which represented a decrease of $0.05 million. This change was mainly due to market volatility.

Sales of our “Anti-Viral/ Infection & Respiratory” product category generated $1.40 million in the six months ended June 30, 2024, and $1.47 million in the six months ended June 30, 2023. This change was mainly due to market volatility.

For the six months ended June 30, 2024, revenue breakdown by product category remained similar to that of the same period in 2023. The “Anti-Viral/Infection & Respiratory” products category represented 61% and 48% of total revenues in the six months ended June 30, 2024 and 2023. The “CNS Cerebral & Cardio Vascular” category represented 30% and 25% of total revenue in the six months ended June 30, 2024 and 2023, respectively. The “Others” category represented 5% and 15% of revenues in the six months ended June 30, 2024 and 2023, respectively. And the “Digestive Diseases” category represented 4% and 12% of total revenue in the six months ended June 30, 2024 and 2023, respectively.

Cost of Revenue

For the six months ended June 30, 2024, our cost of revenue was $3.6 million, or 156.9% of total revenue, comparing to $3.0 million, or 99.0% of total revenue, in the same period in 2023. The increase in the proportion of cost to revenue in this quarter was mainly due to the increase in idle equipment costs due to reduced production, as well as the increased inventory impairments.

Gross Profit (Loss) and Gross Margin

Gross loss for the six months ended June 30, 2024 was $1.31 million, compared to gross profit of $0.03 million in the same period in 2023. Our gross loss margin in the six months ended June 30, 2024 was 56.9% compared to a gross profit margin of 1.0% in the same period in 2023. The deterioration of gross margin in this period was mainly due to the increased cost.

Selling Expenses

Our selling expenses for the six months ended June 30, 2024 and 2023 were $0.22 million and $0.31 million, respectively. Selling expenses accounted for 9.6% of the total revenue in the six months ended June 30, 2024 compared to 10.3% in the same period in 2023.

General and Administrative Expenses

Our general and administrative expenses for the six months ended June 30, 2024 were $0.58 million, as compared to $0.53 million in the same period in 2023. Our general and administrative expenses accounted for 25.3% and 17.3% of our total revenues in the six months ended June 30, 2024 and 2023, respectively.

Research and Development Expenses

Our research and development expenses for the six months ended June 30, 2024 and 2023 were $0.20 million and $0.05 million, respectively. The increase in research and development costs is mainly due to drug consistency evaluation.

Bad Debt Expense (Reversal of Allowance for Doubtful Accounts)

Our bad debt expense was $6,410 for the six months ended June 30, 2024, as compared to reversal of allowance for doubtful accounts $5,989 for the six months ended June 30, 2023.

The changes in the allowances for doubtful accounts during the six months ended June 30, 2024 and 2023 were as follows:

Loss from Operations

Our operating loss for the six months ended June 30, 2024 was $2.31 million, compared to $0.85 million in the same period in 2023. The increase in loss from operation is triggered by the decrease in the revenue and increase in the cost of revenue as described above.

Net Interest Expense

Net interest expense for the six months ended June 30, 2024 was $0.09 million, compared to $0.22 million for the same period in 2023.

Net Loss

Net loss for the six months ended June 30, 2024 was $2.40 million, as compared to net loss of $1.07 million for the six months ended June 30, 2023. The increase of net loss was mainly a result of increased cost and expenses in this period.

For the six months ended June 30, 2024, loss per basic and diluted common share was $0.16, compared to loss per basic and diluted common share of $0.65 for the six months ended June 30, 2023.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 14,727,410 for the six months ended June 30, 2024, and 1,653,076 for the six months ended June 30, 2023.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations and bank lines of credit. Currently the Company has not witnessed or expected to encounter any difficulties to refinance those lines of credit this year. As of June 30, 2024, the aggregated advance from our CEO was $1,140,775 for use in operations. Our cash and cash equivalents were $0.74 million, representing 5.2% of our total assets, as of June 30, 2024, as compared to $1.42 million, representing 8.6% of our total assets as of December 31, 2023. All of the $0.74 million of cash and cash equivalents as of June 30, 2024 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 8 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 9 to the unaudited condensed consolidated financial statements contained in this report which is incorporated by reference herein.

Although the Company obtained additional lines of credit in three and six months ended June 30, 2023, there can be no assurance that the Company will be able to achieve its future strategic goals, including the launch of new 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 2023, there can be no assurances that this will continue 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 $0.66 million for the six months ended June 30, 2024, compared to $1.68 million in the same period in 2023.

As of June 30, 2024, our net accounts receivable was $0.25 million, compared to $0.50 million as of December 31, 2023.

Total inventory was $2.82 million and $3.73 million as of June 30, 2024 and December 31, 2023, respectively.

Investing Activities

There was $28,086 used in investing activities during the six months ended June 30, 2024, compared to $60,465 provided by investing activities for the same period in 2023.

Financing Activities

Net cash provided by financing activities was $0.01 million in the six months ended June 30, 2024; compared to net cash used in financing activities of $0.52 million for the same period in 2023.

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, 2024 and December 31, 2023, Helpson’s net assets totaled $(4,375,345) and $(2,289,000), 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, 2024 and December 31, 2023, respectively. The amount that Helpson must set aside for the statutory surplus fund accounts exceeds its total net assets at June 30, 2024 and December 31, 2023. There were no allocations to the statutory surplus reserve accounts during the six months ended June 30, 2024.

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, 2024, 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 (“GAAP”). Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Please refer to Note 1 to our unaudited condensed consolidated financial statements, “Organization and Significant Accounting Policies” for the discussion of our critical accounting policies.

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, 2024 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, 2023, filed with the SEC on April 1, 2024. 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.