China Pharma Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. China Pharma manufactures and markets generic, branded and biochemical products primarily in China.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | 2019: $2.57 million; 2018: $3.17 million | 2019: $5.50 million; 2018: $6.79 million |
| Gross profit / margin | 2019: $0.16 million / 6.4%; 2018: $0.58 million / 18.3% | 2019: $0.82 million / 14.9%; 2018: $1.63 million / 24.1% |
| Operating loss | 2019: $0.75 million; 2018: $0.86 million | 2019: $1.09 million; 2018: $1.01 million |
| Net loss | 2019: $0.84 million; 2018: $1.01 million | 2019: $1.26 million; 2018: $1.30 million |
| Loss per share | Both periods: $0.02 | Both periods: $0.03 |
| Operating cash flow | Six months: $0.93 million in 2019, versus $0.12 million in 2018 |
Q2 revenue fell 19% year over year; first-half revenue also fell 19%. Cost of revenue declined less quickly than sales, increasing its share of revenue to 94% in Q2 (from 82%) and 85% in the first half (from 76%). Management attributed margin pressure to lower sales and relatively stable fixed costs. First-half selling and administrative expenses declined, while R&D expense rose to $0.14 million from $0.05 million, largely due to consistency evaluations. Bad-debt expense fell to $0.02 million from $0.35 million for the first half.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $1.66 million; restricted cash was $0.50 million. Current assets were $7.69 million and current liabilities $8.98 million.
- Construction-loan debt totaled $6.40 million, including $2.18 million current. The company reported $0.50 million in banker’s acceptance notes payable, matched by restricted cash. The loan was secured by the production facility and equipment.
- In July 2019, the company made a required approximately $2.2 million construction-loan principal payment. Its chairperson, CEO and interim CFO advanced $693,848 in July under a one-year loan bearing 4.35% interest.
- Six-month investing cash outflow was $0.07 million and financing cash outflow was $0.38 million. Net cash increased $0.47 million during the period.
- Net trade receivables were $0.68 million, against a $17.84 million allowance; 95.9% of receivables were more than 720 days old. Two customers represented 49.7% and 10.7% of receivables.
Material changes, outlook and risks
- Management cited hospital policies limiting medicine spending as a key cause of declining sales. First-half decreases were broad-based, including anti-viral/infection and respiratory products, digestive-disease products and other products.
- Drug-registration requirements, generic-drug consistency evaluations, clinical-trial costs, environmental compliance costs and shortages of active pharmaceutical ingredients and intermediates are pressuring operations. Approval delays have extended pipeline timelines; some pipeline projects were terminated, and management reported no further pipeline development in the first half.
- The filing states that continuing operating losses, debt service and other costs raise substantial doubt about the company’s ability to continue as a going concern within one year. Management plans include seeking customer prepayments, improving collections, exploring strategic alternatives to accelerate nutrition-product launches, and seeking loans secured by fixed assets. The plans were not finalized and were not considered probable of effective implementation; management cautioned that there is no assurance they will succeed.
- Management said its current operating plan is expected to fund working capital and anticipated capital expenditures for the next 12 months, but also disclosed the going-concern uncertainty. Most cash is held in the Chinese subsidiary and considered indefinitely reinvested; PRC currency-conversion and remittance controls may constrain transfers to the parent.
- Additional risks include foreign-exchange exposure, customer collection risk, concentration in raw-material suppliers, regulatory and pricing changes in China, and potential limits on access to financing. The company had approximately $0.30 million of future formula-approval contract commitments and reported no off-balance-sheet arrangements.
- The company adopted the lease accounting standard in 2019, recording lease right-of-use assets and liabilities. Disclosure controls were not effective at June 30 because of a material weakness involving insufficient personnel knowledgeable in U.S. GAAP financial reporting; management nevertheless stated the reported statements were fairly stated in all material respects.
- No specific revenue or earnings guidance was provided. Management expects operating losses to continue for the foreseeable future.
Key facts for investors to verify
- Whether the company can fund operations and meet scheduled debt payments after the July loan repayment, and whether further related-party financing or bank credit is available.
- Receivable collectability and allowance adequacy, given the high proportion of balances over 720 days old and customer concentration.
- Progress and economics of consistency evaluations, product approvals, pipeline plans and the proposed nutrition-product strategy.
- Whether sales, gross margins and operating cash generation stabilize amid hospital spending controls and rising compliance and input costs.
- Remediation of the material weakness in financial reporting controls and the effect of PRC currency and remittance restrictions on parent-company liquidity.