China Pharma Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The interim financial statements are unaudited and prepared under U.S. GAAP. The company’s PRC subsidiary manufactures and markets generic and branded pharmaceutical and biochemical products, primarily in China.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2.30 million | $3.16 million | $9.09 million | $9.36 million |
| Gross profit / margin | $0.51 million / 22.3% | $0.42 million / 13.3% | $2.15 million / 23.6% | $1.79 million / 19.1% |
| Operating loss | $1.93 million | $2.06 million | $2.94 million | $4.99 million |
| Net loss | $1.86 million | $2.20 million | $3.16 million | $5.45 million |
| Loss per share, basic and diluted | $0.04 | $0.05 | $0.07 | $0.13 |
- For the nine months, operating cash flow was positive $1.01 million, versus negative $0.10 million in 2017. Investing cash outflow was $0.03 million; financing cash outflow was $2.30 million, primarily loan principal repayment. Cash and cash equivalents declined by $1.36 million to $0.67 million.
- At September 30, current assets were $9.71 million and current liabilities $9.77 million. Restricted cash of $1.48 million corresponded to $1.48 million of bankers’ acceptance notes payable.
- Construction-loan debt was $6.55 million, including $2.18 million current and $4.37 million noncurrent; total liabilities were $14.90 million. The loan bears a 5.73% rate, and the company reported making required payments.
- Trade receivables, net of an $18.66 million allowance, were $0.79 million. Inventory was $6.10 million. The allowance increased from $18.21 million at year-end 2017.
Material changes versus the prior period
- Q3 revenue fell about 27%, while nine-month revenue declined about 3%. Q3 gross margin improved to 22.3% from 13.3%; nine-month gross margin rose to 23.6% from 19.1%, which management attributed partly to more efficient raw-material consumption.
- Nine-month net loss narrowed by $2.29 million. No long-term-asset impairment was recorded in 2018, compared with $2.16 million in the first nine months of 2017. However, nine-month bad-debt expense increased to $1.48 million from $0.95 million.
- Q3 bad-debt expense was $1.13 million versus approximately $0.23 million in Q3 2017. Management cited receivables aging beyond two years, which are reserved at 100% under its policy. At September 30, 95.3% of receivables in the aging table were more than 720 days old.
- Foreign-currency translation reduced nine-month comprehensive results by $2.28 million, versus a $3.57 million translation gain in 2017.
Outlook, commentary, and risks
- No specific financial guidance was provided. Management said it expects operating cash flow to cover working-capital needs and anticipated capital spending for the next 12 months, including consistency evaluations and formula acquisitions. It cautioned that changed circumstances could require additional financing or spending reductions; financing may not be available on acceptable terms.
- Management described Q3 market fluctuations and ongoing sales-promotion efforts. Anti-viral/infection and respiratory products were the largest category and declined year over year, principally due to lower Cefaclor sales; management also cited market-related changes in other product categories.
- China’s generic-drug consistency evaluations and revised regulatory approval requirements may require additional testing, investment, and time. The company has discontinued some pipeline products and reported delays in approvals. It had approximately $1.1 million of future formula-contract payments contingent on completion of phases.
- All revenue is denominated in RMB. PRC currency-conversion and remittance controls may constrain transfers to the parent company; the company said its $0.67 million cash balance was expected to remain reinvested in its PRC subsidiary. PRC operations also expose it to policy, economic, legal, and foreign-exchange risks.
- Two customers represented 47.3% and 14.0% of receivables; three suppliers represented 23.6%, 20.5%, and 13.5% of raw-material purchases. Management reported no material subsequent events and no off-balance-sheet arrangements.
- Disclosure controls were determined ineffective as of September 30, 2018 because of a material weakness involving insufficient accounting and financial-reporting personnel knowledgeable in U.S. GAAP. Management nevertheless stated the financial statements were fairly stated in all material respects.
Important facts for investors to verify
- Collectability and aging of receivables, the adequacy of the $18.66 million allowance, and the implications of the very high share aged over 720 days.
- Cash availability and liquidity, including restricted cash, scheduled construction-loan repayments, and limits on moving funds out of China.
- Progress, costs, and approval prospects for generic-drug evaluations and the medical-formula pipeline, including the $1.1 million contingent commitment.
- Remediation of the disclosed internal-control material weakness and the company’s ability to maintain effective SEC reporting controls.