China Pharma Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. China Pharma is a Nevada holding company whose wholly owned PRC subsidiary, Helpson, develops, manufactures and markets pharmaceutical products in China. Financial statements are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1.10 million | $1.61 million | $3.06 million | $3.22 million |
| Gross profit (loss) | $(0.15) million | $(0.23) million | $0.03 million | $(0.40) million |
| Gross margin | (13.4)% | (14.2)% | 1.0% | (12.4)% |
| Operating loss | $(0.46) million | $(0.78) million | $(0.85) million | $(1.69) million |
| Net loss | $(0.59) million | $(0.89) million | $(1.07) million | $(1.92) million |
| Basic and diluted loss per share | $(0.06) | $(0.18) | $(0.12) | $(0.40) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(1.68) million | $(1.21) million |
Q2 revenue fell 31.9% year over year, which management attributed mainly to reduced drug purchasing after customers stocked up in Q1 following the relaxation of COVID controls in China. First-half revenue declined 4.9%. Gross margin improved substantially for the first half, primarily due to lower costs and increased prices on certain products, but remained negative in Q2.
Financial position and liquidity
- At June 30, cash and cash equivalents were $0.90 million, down from $2.03 million at December 31, 2022. The company reported $5.53 million in current assets and $10.55 million in current liabilities, implying a $5.02 million working-capital deficit.
- Total assets were $15.70 million; total liabilities were $11.35 million; stockholders’ equity was $4.35 million. Inventory increased to $3.91 million from $2.95 million.
- Current debt included $2.84 million of bank lines of credit, $2.45 million owed to related parties, and a $2.35 million net convertible note payable. The bank facilities were due in September and December 2023. The CEO personally guaranteed certain bank loans; one facility is secured by company property and equipment.
- Cash used in operating activities was $1.68 million for the first half. Financing provided $0.52 million. The investing cash-flow presentation is inconsistent: the statement labels $60,465 as cash used while showing a positive amount, and MD&A describes the amount as provided.
- The company says its $0.90 million cash is held in its Chinese subsidiary and is not expected to be available for parent-company or shareholder payments. PRC currency conversion and remittance controls may further restrict transfers.
Material changes, outlook and risks
- Going concern: Management states that recurring losses, limited liquidity and financing needs raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the statements. Management plans to improve advance-payment sales and receivable collections, pursue nutrition-product opportunities, and consider using fixed assets as collateral. These plans are not finalized, and the filing says substantial doubt remains.
- Convertible note and dilution: In April 2023, the note maturity was extended to May 19, 2024, with a $65,639 extension fee added to the balance. The conversion discount was reduced from 85% to 82% of the lowest VWAP in the applicable ten-day period, and monthly redemptions or penalty fees were added. Multiple redemptions during the first half were settled in shares. At June 30, the filing states the note was redeemable into 8.18 million shares, subject to its terms. A further $150,000 redemption was settled with 699,953 shares on August 11, 2023.
- Share-count changes: The company completed a 1-for-10 reverse split effective March 6, 2023. Note disclosures report 11,424,632 shares at June 30, while the balance sheet reports 8,449,925; the cover page reports 11,432,801 outstanding as of August 7. These figures should be reconciled.
- Products: Candesartan tablets passed China’s generic-drug quality and efficacy consistency evaluation on August 9, 2023. Management says consistency evaluations and centralized procurement can require investment while exposing products to sharp price reductions. It is also exploring a nutrition-products launch, but provides no quantified outlook or timetable.
- Customer and collection exposure: Three customers represented 53.4%, 11.5% and 10.5% of receivables. The filing reports that 98.24% of receivables were over 720 days old, with a $16.13 million allowance for doubtful accounts. Management notes that extended payment practices by state-owned hospitals and distributors are common.
- Other risks and controls: Operations and revenue are concentrated in China and RMB, exposing the company to regulatory, economic, foreign-exchange and remittance risks. Management reported disclosure controls were ineffective due to a material weakness involving insufficient personnel knowledgeable in U.S. GAAP financial reporting; no material changes in internal controls were reported for the quarter.
Important facts for investors to verify
- Reconcile the June 30 share counts in the balance sheet, equity statement and subsequent cover-page disclosure, and assess dilution from the note’s variable-price redemptions.
- Confirm the current convertible-note balance, remaining redemption obligations, maturity terms and any subsequent share issuances or penalties.
- Assess available cash and financing against near-term bank maturities, the working-capital deficit and management’s going-concern plans.
- Review the collectability and aging of receivables, adequacy of the allowance and concentration among major customers.
- Clarify the inconsistent investing cash-flow presentation and monitor remediation of the disclosed financial-reporting control weakness.