China Pharma Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company develops, manufactures, and markets pharmaceutical products in China. Its operations are conducted in the PRC, and revenue is denominated in RMB.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.98 million | $2.40 million | $6.75 million | $7.94 million |
| Gross profit (loss) | $(0.30) million | $0.05 million | $0.05 million | $1.39 million |
| Gross margin | -15% | 2% | 0.7% | 17.5% |
| Operating loss | $(0.76) million | $(0.95) million | $(2.21) million | $(1.48) million |
| Net loss | $(0.83) million | $(1.01) million | $(2.42) million | $(1.66) million |
| Loss per share, basic and diluted | $(0.02) | $(0.02) | $(0.05) | $(0.04) |
For the first nine months, operating cash used was $52,000, investing cash used was $431,000, and financing cash used was $22,000. Cash declined by $499,000 to $459,000. Cash was held in the Chinese subsidiary and management said it was not expected to be available to the parent or shareholders.
At September 30, current assets were $4.14 million and current liabilities were $10.45 million, a working-capital deficit of about $6.31 million. Total assets were $18.18 million, total liabilities $11.33 million, and stockholders’ equity $6.85 million. Current lines of credit were $4.33 million; related-party borrowings were $3.06 million. The construction loan was fully repaid during the period. The company reported no income tax expense.
Material changes versus comparable periods
- Q3 revenue decreased 17.6% year over year. The company attributed the decline principally to centralized drug purchasing and related price reductions; sales of Cefaclor Dispersible Tablets were a key product-level contributor.
- Nine-month reported revenue fell 14.9%, while domestic pharmaceutical revenue increased from $6.23 million to $6.75 million. The prior-year period included $1.70 million of COVID-19 test-kit exports that did not recur.
- Nine-month gross margin contracted to 0.7% from 17.5%. Management cited the prior-year high-margin test-kit export, lower prices for major drugs, and higher raw-material and packaging costs.
- Nine-month net loss widened by about $761,000, despite lower selling expenses. Q3 net loss narrowed, primarily as selling expenses fell to $134,000 from $654,000.
- Research and development expense rose to $265,000 for the nine months from $116,000. The company said these costs mainly supported product consistency evaluations.
Outlook, risks, contingencies, and unusual items
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance. It anticipates continued operating losses. Mitigation plans include improving advance-payment sales and collections, exploring strategic alternatives to accelerate nutrition products, and seeking loans against fixed assets; plans were not finalized and their implementation was not assured.
- Funding dependence: The CEO and interim CFO advanced funds; amounts owed to her were $1.70 million at quarter-end. Management cautioned that future related-party advances and external financing are not assured. A new $1.54 million Bank of China credit line was obtained in September, due in September 2022 and secured by the production facility and equipment, with a personal guarantee.
- Receivables: Net trade receivables were $444,000 against an allowance of $18.25 million. The filing states 97.4% of receivables were over 720 days old. Three customers represented 52.2%, 11.2%, and 10.2% of receivables, respectively.
- Concentration and operating risks: Three products generated 29.2%, 19.1%, and 14.7% of nine-month revenue; three suppliers accounted for 27.3%, 16.1%, and 13.0% of raw-material purchases. The company cited COVID-related disruption risks, PRC regulatory and economic risks, RMB conversion/remittance restrictions, and industry-wide drug price pressure from centralized procurement.
- Product development: One product passed biological-equivalence testing in March 2021; the company planned to submit an application to the NMPA. Management described progress on generic-drug consistency evaluations as slow amid changing policy, market prospects, and investment returns. No quantified financial guidance was provided.
- Equity compensation: In September, the company issued 1.76 million shares at $0.67 per share to partially settle $1.18 million of unpaid executive compensation, and granted an immediately vested option for 65,000 shares at a $1.47 exercise price.
- Controls: Management said disclosure controls were not effective because of 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.
Important facts for investors to verify
- Assess liquidity and the going-concern plans against the $6.31 million working-capital deficit, low cash balance, upcoming credit maturities, and dependence on related-party funding.
- Review the collectability and aging of receivables, the large allowance, and customer concentration.
- Track product pricing, raw-material costs, gross margins, and whether sales growth in domestic pharmaceuticals can offset the nonrecurrence of test-kit exports.
- Reconcile share-count disclosures: the financial statements report weighted-average shares of 46.00 million for Q3 and 45.72 million for nine months, while MD&A cites 47.34 million for both periods.
- Check MD&A period references: its Q3 revenue discussion refers to comparison with “June 30, 2020,” although the financial statements present the three months ended September 30, 2020.