China Pharma Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. The company manufactures and markets generic and branded pharmaceutical and biochemical products, primarily in China.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3.16 million | $3.13 million | $9.36 million | $10.31 million |
| Gross profit | $0.42 million | $0.35 million | $1.79 million | $1.47 million |
| Gross margin | 13.3% | 11.2% | 19% | 14% |
| Operating loss | $2.06 million | $1.55 million | $4.99 million | $5.09 million |
| Net loss | $2.20 million | $1.75 million | $5.45 million | $5.76 million |
| Loss per share, basic and diluted | $0.05 | $0.04 | $0.13 | $0.13 |
Q3 revenue was nearly flat year over year; nine-month revenue declined 9.2%, mainly due to lower Cefaclor and Gastrodin sales. Nine-month gross margin improved as cost of revenue fell faster than sales. Q3 net loss widened, primarily because of higher impairment charges.
For the first nine months, operating cash flow was negative $95,547, versus positive $1.42 million in 2016. Investing cash outflow was $67,324; financing cash outflow was $1.47 million, principally construction-loan repayments. Cash and equivalents fell to $1.12 million from $2.67 million at year-end 2016. Restricted cash was $1.38 million.
At September 30, 2017, total assets were $74.99 million and current liabilities were $10.38 million; current assets were $15.00 million. Construction-loan debt totaled approximately $9.17 million, including $2.29 million current and $6.88 million long term. Banker’s acceptance notes payable were $1.38 million, matched by restricted cash. The company reported a $1.35 million related-party payable to a director, bearing 1% annual interest.
Material changes and unusual items
- Impairment of advances for medical-formula purchases was $2.16 million for the nine months, versus $1.47 million in 2016; the Q3 charge was $1.18 million. The company identified impairment relating to three formulas at two laboratories. Advances for intangible-asset purchases remained substantial at $35.41 million.
- Net trade receivables were $2.91 million, with a $17.64 million doubtful-account allowance. Management reported that 77.2% of receivables were more than 720 days old; $2.8 million was past due by more than 90 days.
- Product mix shifted: nine-month Anti-Viro/Infection & Respiratory revenue fell 15% and CNS/Cerebral/Cardio Vascular revenue fell 21%; “Other” revenue rose 34%, mainly due to Vitamin B6 sales.
- Accumulated other comprehensive income increased, reflecting a $3.57 million foreign-currency translation gain for the nine months; comprehensive loss was $1.88 million.
Outlook, risks and contingencies
Management gave no quantified revenue or earnings guidance. It said operating cash was expected to cover working capital and anticipated capital expenditures over the next 12 months, but warned that failure to meet its plan could require additional financing or spending cuts; financing availability and terms are not assured. This outlook should be considered alongside the period’s negative operating cash flow and limited cash balance.
Management cited healthcare reform, drug-tender price pressure, loss of market share after earlier GMP-related production interruptions, and delays and added costs in CFDA approvals. Generic-drug consistency evaluations apply to much of the company’s portfolio and are expected to materially affect operations. The company’s PRC operations and RMB-denominated revenue are exposed to regulatory, economic, currency-conversion and remittance risks.
The company decided not to renew its National High-Tech Enterprise status; the PRC income tax rate was 25% for 2017, compared with 15% in 2016. PRC tax-loss carryforwards of approximately $56.7 million begin expiring in 2018. The company also disclosed approximately $2.8 million of payments due to laboratories over four years as contract phases are completed. No off-balance-sheet arrangements were reported.
Management concluded disclosure controls were effective as of September 30, 2017 and reported no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Recoverability and timing of the $35.41 million in formula-purchase advances, given impairments and lengthy CFDA approval processes.
- Collection prospects for aged receivables, adequacy of the allowance, and concentration: two customers represented 47% and 14% of receivables.
- Liquidity assumptions behind management’s 12-month cash-sufficiency outlook, including scheduled debt repayments and restricted cash.
- Impact and cost of generic-drug consistency evaluations, GMP requirements, and the 25% PRC tax rate on future performance.
- Ability to obtain approvals and meet approximately $2.8 million in formula-contract commitments without additional financing.