China Pharma Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results; U.S. GAAP. The company manufactures and markets generic and branded pharmaceuticals and biochemical products primarily in China.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2.92 million | $3.54 million | $6.20 million | $7.18 million |
| Gross profit / margin | $0.65 million / 22.2% | $0.48 million / 13.6% | $1.37 million / 22.0% | $1.12 million / 15.6% |
| Operating loss | $2.13 million | $2.22 million | $2.93 million | $3.54 million |
| Net loss | $2.29 million | $2.45 million | $3.25 million | $4.01 million |
| Loss per share | $0.05 | $0.06 | $0.07 | $0.09 |
| Operating cash flow | Not presented by quarter | $(0.77) million | $0.55 million |
For the first half, cash used in investing was $0.05 million and cash used in financing was $0.15 million. Cash and cash equivalents decreased $0.92 million to $1.75 million; restricted cash was $2.57 million. Management says cash at the Chinese subsidiary is considered indefinitely reinvested and is not expected to be available for parent-company or shareholder payments.
Financial position and material changes
- At June 30, 2017, total assets were $77.12 million, total liabilities $19.98 million, and stockholders’ equity $57.14 million. Current assets were $17.21 million and current liabilities $10.48 million.
- Construction loan facility totaled approximately $10.18 million, including $1.33 million current; its stated weighted interest rate was 5.73%. The company paid the scheduled RMB 9 million installment, approximately $1.32 million, in July 2017. No further borrowing was available under the facility.
- Banker’s acceptance notes payable rose to $2.57 million from $1.09 million at year-end; matching restricted cash is pledged for these notes. Accounts receivable, net, was $3.15 million, down from $4.00 million; inventory was $7.26 million, broadly unchanged.
- Revenue fell 17.7% in Q2 and 13.7% in the first half year over year. Management attributed the decline primarily to Chinese healthcare reforms curbing hospitals’ drug purchases, and lower sales of Cefaclor Dispersible Tablets and Gastrodin. Higher gross margins reflected a more favorable mix of higher-margin products.
- First-half net loss narrowed by about $0.75 million, mainly from improved gross margin and lower bad-debt expense. The company nevertheless recorded a $0.98 million impairment of advances for medical formulas in the first half, versus $0.82 million in 2016.
Outlook, risks, and other notable items
- Management expects operating cash flow to cover working capital and anticipated capital expenditures for the next 12 months, including formula acquisitions and remaining GMP-related equipment. This assessment is conditional; if operating assumptions change, the company may need financing or spending reductions, and financing may not be available on acceptable terms.
- No specific revenue or earnings guidance was provided. Management says generic-drug consistency evaluations and changing CFDA requirements may affect existing products and the pipeline; approvals have faced delays, additional testing and costs. No new pipeline progress was reported for the quarter.
- Approximately $3.1 million is payable to laboratories and service providers over roughly four years, contingent on completion of contract milestones for CFDA formula approvals.
- Receivable collection is a significant concern: $3.0 million was more than 90 days past due at June 30, and 75.4% of receivables were over 720 days old. Two customers represented 46.8% and 13.9% of receivables. The allowance for doubtful accounts was $16.81 million against gross trade receivables.
- Three suppliers represented 60.9% of first-half raw-material purchases. All revenue is denominated in RMB; government controls may restrict currency conversion and remittance from China. The company also cited PRC political, regulatory, economic, and foreign-exchange risks.
- The company’s PRC income tax rate is 25% for 2017 and thereafter after it decided not to renew its high-tech enterprise status; the prior preferential rate was 15%. PRC tax loss carryforwards of approximately $53.9 million begin expiring in 2018, and management recorded a $22.92 million valuation allowance against deferred tax assets.
- Disclosure controls and procedures were reported ineffective as of June 30, 2017, due to insufficient personnel knowledgeable in U.S. GAAP financial reporting. No material changes in internal control were identified during the quarter.
- The filing reports no off-balance-sheet arrangements. It cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether hospital purchasing trends, drug tender conditions, and generic-drug consistency requirements continue to pressure revenue and product approvals.
- Collectability and aging of receivables, adequacy of the allowance, and concentration of balances with the two largest customers.
- Cash generation and access to funds held in China, including the effect of currency conversion and remittance restrictions.
- Ability to meet loan repayments and formula-development commitments while funding operations, and progress in resolving the disclosed financial-reporting control weakness.