China Pharma Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless stated otherwise, amounts are U.S. dollars. China Pharma is a Nevada holding company; its wholly owned operating subsidiary manufactures and sells pharmaceutical products in China.
Financial results and liquidity
- Q3 revenue: $1.80 million, down 8% year over year. Gross loss was $233,000 (13% gross loss margin), versus $138,000 (7%) a year earlier. Operating loss was $714,000, and net loss was $778,000, compared with $689,000 and $791,000, respectively. Basic and diluted loss per share was $0.06 versus $0.16.
- Nine-month revenue: $4.86 million, down 6% year over year. Gross loss was $202,000 (4.2% gross loss margin), improved from $537,000 (10.4%). Operating loss was $1.57 million versus $2.38 million; net loss was $1.85 million versus $2.71 million. Loss per share was $0.18 versus $0.56.
- Cash flow: Operating activities used $677,000 in the first nine months, compared with $994,000 used in 2022. Investing activities used $7,000; financing activities provided $43,000. Cash declined by $660,000 to $1.37 million.
- Balance sheet and liquidity: Cash was $1.37 million; current assets were $5.81 million and current liabilities $7.06 million, a working-capital deficit of approximately $1.25 million. Total assets were $15.35 million, total liabilities $9.24 million, and stockholders’ equity $6.11 million. Cash held by the Chinese subsidiary is described as not expected to be available for payments to the parent or shareholders.
- Borrowings: Lines of credit totaled approximately $2.41 million, including $1.02 million current and $1.39 million due in 2026. A new three-year RMB 10 million revolving loan was obtained in September 2023, at 3.35% for its first year and then a variable rate. The current portion of the convertible note was $1.74 million; related-party borrowings from the CEO were $1.11 million. Nine-month interest expense was $283,000.
Changes versus the prior comparable period
- Nine-month sales decreased in CNS/cardiovascular products (17%), anti-viral/infection/respiratory products (24%), and other products (19%); digestive-disease sales rose 252%, primarily due to Omeprazole. Management attributed lower Roxithromycin sales to lower third-quarter demand after first-quarter drug hoarding and the effects of centralized procurement.
- Q3 digestive-disease revenue rose to $650,000 from $120,000, while anti-viral/infection/respiratory revenue fell to $630,000 from $1.03 million. Higher-cost product mix contributed to the greater Q3 gross loss margin.
- Operating expenses declined year over year for the nine-month period, contributing to lower operating and net losses despite lower revenue. Q3 operating loss was slightly higher, while net loss was broadly similar.
- Common shares outstanding on the balance sheet rose to 28.7 million from 7.5 million at year-end 2022, including shares issued in note redemptions and a 13.76 million-share conversion of related-party debt and interest. The filing reports 32.95 million shares outstanding as of November 10, 2023. Per-share figures reflect the 1-for-10 reverse split effective March 6, 2023.
Outlook, risks, and unusual items
- Going concern: The company reported an accumulated deficit of $38.1 million and stated that recurring losses and other conditions raise substantial doubt about its ability to continue as a going concern within one year after issuance of the financial statements. Management plans to increase advance-payment sales and collections, explore strategic alternatives to accelerate nutrition-product launches, and consider using fixed assets as collateral. It said the plans were not finalized and could not be considered probable of implementation; there is no assurance they will resolve the uncertainty.
- Convertible-note dilution and terms: The note’s maturity was extended to May 19, 2024. The investor may redeem up to $500,000 per calendar month in cash or shares, at a conversion price tied to 82% of the lowest daily volume-weighted average price in the prior ten trading days. At September 30, the note was potentially redeemable into 14.63 million shares. Redemptions after quarter-end resulted in additional share issuances, including an issuance reported in November.
- Receivables: Gross receivables were $16.58 million, with a $16.21 million allowance and about $368,000 net. Approximately 97.7% of gross receivables were over 720 days old. Three customers represented 53.1%, 11.5%, and 10.4% of receivables.
- Regulatory and operating risks: Centralized procurement can sharply reduce drug prices, and consistency-evaluation requirements affect eligibility. The company operates in China, earns revenue in RMB, and is subject to PRC currency conversion and remittance controls. Candesartan tablets passed the generic-drug consistency evaluation in August 2023. The filing provides no quantified revenue or profit guidance.
- Controls: Management concluded disclosure controls were ineffective because of a material weakness related to insufficient personnel knowledgeable in U.S. GAAP financial reporting. Management nevertheless stated that the interim financial statements were fairly stated in all material respects.
- The filing reports no off-balance-sheet arrangements. No income tax provision was recorded; approximately $3.3 million of PRC tax-loss carryforwards were due to expire in December 2023.
Important facts for investors to verify
- Whether management can implement its liquidity and going-concern plans, and whether additional financing or CEO support will be available.
- The convertible note’s remaining balance, redemption activity after September 30, and potential dilution; reconcile the share issuances reported after quarter-end with the November 10 share count.
- The repayment or refinancing status of the bank credit facility due December 20, 2023, and the terms and availability of the new revolving facility.
- Recoverability of the very aged receivables, customer concentration, and the basis for the allowance for doubtful accounts.
- Whether centralized procurement, product mix, and sales trends will continue to pressure revenue and gross margins, and whether the internal-control material weakness is remediated.