China Pharma Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company develops, manufactures, and markets pharmaceutical products in China; all operations are conducted in the PRC. Financial statements are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.42 million | $3.77 million | $4.77 million | $5.53 million |
| Gross profit (margin) | $0.07 million (2.9%) | $1.15 million (30.5%) | $0.34 million (7.2%) | $1.34 million (24.3%) |
| Operating income (loss) | $(0.75) million | $0.07 million | $(1.45) million | $(0.52) million |
| Net income (loss) | $(0.82) million | $0.01 million | $(1.59) million | $(0.65) million |
| Basic and diluted EPS | $(0.02) | $0.00 | $(0.03) | $(0.01) |
- Six-month cost of revenue was $4.43 million, or 92.8% of revenue, versus $4.19 million, or 75.8%, in 2020. Selling expenses declined to $0.82 million from $1.05 million; R&D rose to $0.24 million from $0.08 million.
- Six-month operating cash flow was positive $0.40 million, versus cash used of $0.15 million in 2020. Investing used $0.02 million; financing provided $0.40 million. Cash increased to $1.75 million from $0.96 million at year-end.
- At June 30, current assets were $5.26 million and current liabilities $12.19 million, a working capital deficit of approximately $6.93 million. Total assets were $19.94 million; liabilities $13.42 million; stockholders’ equity $6.52 million.
- Reported borrowings included $2.17 million of construction-loan debt and $2.85 million of lines of credit, plus $2.82 million due to related parties. Cash was $1.75 million. The company reported $169,893 of operating lease liabilities.
Changes and operating context
- Q2 revenue fell 35.9%, and six-month revenue fell 13.7%. Management attributed the year-over-year declines principally to approximately $1.7 million of COVID-19 test-kit trading revenue in Q2 2020 that did not recur.
- Excluding that prior-year test-kit trade, domestic pharmaceutical revenue increased 15% in Q2 and 25% for the first six months. CNS/cardiovascular and anti-infective/respiratory product sales were the main growth contributors; lower sales of masks and other protective products weighed on “Other” revenue.
- Margins weakened amid lower selling prices for some products, higher pharmaceutical and packaging-material costs, and the absence of the higher-margin test-kit trade. The company recorded a $121,604 inventory write-off in the first half.
- Cash from operations improved from the prior-year period, supported in part by inventory reduction and changes in working capital. Capital spending fell substantially from 2020, when the company purchased mask production lines.
Outlook, risks, and notable items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. It anticipates continuing losses and cites debt service and operating costs. Proposed measures include improving advance-payment sales and receivable collections, pursuing nutrition products, and seeking financing using fixed assets as collateral; plans were not finalized and their implementation was not considered probable.
- Management stated that China’s COVID-19 controls had supported a return to normal operations, while warning that future supplier/customer disruption and broader economic effects remained possible.
- The company is adapting to China’s generic-drug consistency evaluations and centralized procurement, which can reduce prices and affect product eligibility and profitability. One product passed biological-equivalence testing in March 2021; the company planned to submit an application to the NMPA.
- Receivables remain a significant concern: net trade receivables were $409,675 after an allowance of $18.32 million; 97.53% of receivables in the disclosed aging table were more than 720 days old. Three customers represented 52.3%, 11.3%, and 10.3% of receivables.
- All $1.75 million of cash was held in the Chinese subsidiary and considered indefinitely reinvested; PRC currency conversion and remittance restrictions may limit transfers to the parent. Approximately $20.2 million of PRC tax-loss carryforwards were due to expire in December 2021.
- Disclosure controls were deemed ineffective due to a material weakness involving insufficient personnel knowledgeable in U.S. GAAP financial reporting. Management nevertheless stated the financial statements were fairly stated in all material respects.
- No numerical financial guidance was provided. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the construction-loan disclosures: the notes say a required RMB 14 million payment was made July 10, 2021, while MD&A says the construction loans were fully repaid on that date and also refers to repayment of RMB 80 million. Confirm the actual payment, remaining debt, and post-quarter liquidity.
- Confirm the share-count discrepancy: the balance sheet reports 45,579,557 shares issued and outstanding at June 30, while the cover reports 43,579,557 shares outstanding as of August 5, 2021.
- Assess recoverability and collection timing of the heavily aged receivables, customer concentration, and the adequacy of the $18.32 million allowance.
- Monitor the company’s ability to fund operations and meet debt obligations without continued insider advances or new financing, and whether management’s going-concern plans become actionable.