China Pharma Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited U.S. GAAP results; comparisons are with the corresponding 2017 periods. The company manufactures and sells generic and branded pharmaceutical and biochemical products primarily in China.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $3.174 million | $2.917 million | $6.789 million | $6.202 million |
| Gross profit | $0.579 million | $0.648 million | $1.633 million | $1.366 million |
| Gross margin | 18.3% | 22.2% | 24.1% | 22.0% |
| Operating loss | $0.864 million | $2.131 million | $1.005 million | $2.934 million |
| Net loss | $1.008 million | $2.288 million | $1.302 million | $3.255 million |
| Loss per share, basic and diluted | $0.02 | $0.05 | $0.03 | $0.07 |
Six-month operating cash flow was positive $124,399, versus $773,578 used in 2017. Investing activities used $29,982 and financing activities used $157,071, mainly for construction-loan principal payments. Cash and cash equivalents were $1.936 million at June 30, 2018, down from $2.030 million at year-end 2017. Restricted cash was $1.626 million, matched by banker’s acceptance notes payable of the same amount.
Total assets were $58.308 million and total liabilities were $17.283 million. The construction loan facility totaled $8.914 million outstanding, including $2.115 million current and $6.799 million noncurrent. The company reported a $1.1 million commitment payable to laboratories and other providers as contract milestones are completed.
Changes versus prior periods
- Revenue rose 8.8% in Q2 and 9.5% in the first half. In the first half, growth in CNS/cardiovascular, digestive-disease and other products was partly offset by lower anti-viral/infection/respiratory sales; the latter remained the largest category at 56% of revenue.
- Q2 gross margin declined to 18.3%, attributed to a greater mix of lower-margin products. First-half gross margin improved to 24.1%, attributed to higher-margin product sales.
- First-half operating and net losses narrowed substantially, reflecting higher revenue and lower expenses, including lower bad-debt expense and no repeat of the $977,980 long-term-asset impairment recorded in 2017.
- Comprehensive loss for the first half was $2.046 million, including a $744,707 foreign-currency translation loss; Q2 comprehensive loss was $3.427 million, including a $2.419 million translation loss.
Outlook, risks and notable disclosures
- Management gave no specific revenue or earnings guidance. It said operating cash flow should cover working capital and anticipated capital spending, including generic-drug consistency evaluations and formula acquisitions, for the next 12 months under its current plan. Additional financing may be needed if conditions change; availability and terms are not assured.
- China’s generic-drug consistency evaluations and changing CFDA approval requirements may require additional trials, materials, expense and time. The company said pipeline development did not advance during the first half and that certain products had been discontinued or delayed. No new formula production approvals were obtained in the period.
- Management cited sales promotion and participation in drug tenders and exhibitions as priorities. It described Chinese pharmaceutical demand as growing, while noting pressure from healthcare cost controls and drug-tender pricing.
- Credit quality remains a concern: net receivables were $2.367 million, with $18.238 million allowed for doubtful accounts. The filing states 81.5% of receivables were more than 720 days old; net receivables more than 90 days past due were $1.4 million. Two customers represented 46.4% and 13.7% of receivables, respectively.
- Substantially all operations and revenue are in China and denominated in RMB. Government controls may restrict currency conversion and remittance, and the company identifies PRC political, regulatory, economic and currency risks. June 30 cash was considered indefinitely reinvested in the Chinese subsidiary and unavailable for parent-company payments.
- The company’s PRC tax rate is 25%; it did not renew its high-tech enterprise status. It reported approximately $59.1 million in PRC tax-loss carryforwards, of which about $6.4 million expire in 2018, and a $28.6 million valuation allowance against deferred tax assets.
- Disclosure controls were deemed ineffective at June 30, 2018 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. No material subsequent events were disclosed.
Important facts for investors to verify
- Whether receivable collections improve and the large aged balances remain recoverable, including the concentration in two customers.
- Whether product mix sustains first-half margin gains despite Q2 margin deterioration and continued pricing pressure.
- Progress, cost and approval prospects for generic-drug consistency evaluations and the pipeline; assess the $1.1 million milestone commitment and formula advances of $23.319 million.
- Liquidity after the required RMB 14 million (approximately $2.1 million) construction-loan payment made in July 2018, and whether operating cash flow meets management’s 12-month expectations.
- Remittance constraints, expiring tax-loss carryforwards and remediation of the disclosed financial-reporting control weakness.