China Pharma Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. The company develops, manufactures, and markets pharmaceutical products in China. Financial amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1.764 million | $2.929 million | Down 39.8% |
| Gross profit / margin | $194,439 / 11.0% | $656,530 / 22.4% | Margin down 11.4 percentage points |
| Operating loss | $599,280 | $334,208 | Loss increased |
| Net loss | $660,897 | $417,731 | Loss increased |
| Basic and diluted loss per share | $0.02 | $0.01 | Loss per share increased |
| Net cash used in operating activities | $244,155 | $236,460 | Use of cash increased slightly |
Cost of revenue was $1.570 million, or 89% of revenue, versus $2.273 million, or 78%, a year earlier. Management attributed margin compression mainly to lower revenue and the higher fixed-cost burden relative to sales. Revenue declined across all reported product categories; Anti-Viral/Infection & Respiratory remained the largest category at 68% of sales.
Balance sheet, debt, and liquidity
- At March 31, cash and cash equivalents were $145,932, restricted cash was $331,038, and total current assets were $6.36 million. Current liabilities were $11.17 million, versus $6.36 million of current assets.
- Total assets were $22.44 million; total liabilities were $14.06 million; stockholders’ equity was $8.38 million. The company had an accumulated deficit of $26.63 million.
- Construction-loan debt totaled $4.09 million: $1.98 million current and $2.12 million non-current. The loan bears 5.39% interest; scheduled principal payments are $1.98 million in 2020 and $2.12 million in 2021.
- Cash, cash equivalents, and restricted cash fell to $476,970 from $1.185 million at year-end. Investing activities used $347,795, mainly for property and equipment; financing activities used $106,993.
- Trade receivables, net of a $17.33 million allowance, were $855,084. Inventory was $3.63 million and advances to suppliers were $1.05 million.
Material changes and management commentary
- Management said COVID-19 materially adversely affected operations, including delayed resumption of work, disruptions to distribution and customer or supplier operations, and slower receivable collections. Work resumption had returned to approximately 90% by the end of March.
- Management cited market volatility as contributing to lower Cefaclor sales and lower Vitamin B6 sales. It also noted industry-wide drug price pressure from China’s Group Purchasing Organization programs and slow progress on generic-drug consistency evaluations.
- Management is pursuing advance-payment sales, stronger receivable collection, strategic alternatives to accelerate nutrition products, and possible use of fixed assets as collateral. It launched Noni enzyme in 2018 and sanitizer and masks in early 2020.
- In April 2020, the company obtained a RMB 10 million (approximately $1.4 million) bank credit line at 4.25%; RMB 5 million (approximately $0.7 million) had been advanced. The remaining half is subject to risk review and guarantee-company approval. The facility is guaranteed by a third party and by the CEO/Chair.
Going concern, risks, and controls
- The filing states that recurring losses, low cash, and debt-service needs raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Management said the April credit and operating plans are expected to support the next 12 months, but also said strategic plans were not finalized or sufficiently within its control to alleviate substantial doubt under the applicable accounting assessment.
- All operations and revenue are in China and denominated in RMB. Government controls may limit currency conversion and transfers abroad. The filing also identifies COVID-19, pharmaceutical price competition, customer collections, supplier concentration, and changing regulatory requirements as risks.
- Receivables are highly aged: 94.88% of the reported aging distribution was over 720 days. The allowance for doubtful accounts was $17.33 million. The filing reports net receivables of $855,084; investors should review the gross balance, allowance methodology, and expected recoveries.
- Disclosure controls were deemed ineffective because of a material weakness involving insufficient personnel knowledgeable in U.S. GAAP financial reporting. Management nevertheless concluded the financial statements were fairly stated in all material respects. No material control changes were reported during the quarter.
- Approximately $21.6 million of PRC tax-loss carryforwards are scheduled to expire in December 2020; management recorded a $30.46 million valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether the April credit line’s undrawn portion becomes available and whether financing or related-party advances can be sustained.
- Receivable aging, collection performance, and the adequacy of the substantial doubtful-account allowance.
- Operating cash needs, upcoming construction-loan payments, and the company’s ability to meet obligations despite negative working capital and going-concern doubt.
- The duration and financial effects of COVID-19 disruption, product-level sales trends, and pricing pressure from GPO programs.
- Progress in remediating the U.S. GAAP reporting-control material weakness and any effects of regulatory changes on product approvals and pipeline investments.