China Pharma Holdings, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited U.S. GAAP financial statements. The company manufactures and sells pharmaceutical and biochemical products primarily in China.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $6.13 million | $8.03 million | $13.24 million | $16.28 million |
| Gross profit | $2.42 million | $2.15 million | $5.08 million | $0.58 million |
| Gross margin | 39% | 27% | 38% | 4% |
| Operating loss | $8.53 million | $4.76 million | $10.86 million | $7.76 million |
| Net loss | $8.64 million | $4.46 million | $11.03 million | $7.28 million |
| Loss per share, basic and diluted | $0.20 | $0.10 | $0.25 | $0.17 |
Q2 cost of revenue was $3.71 million. Six-month operating cash flow was $2.41 million, investing cash outflow was $4.54 million, and financing cash inflow was $0.61 million. Cash declined $1.57 million to $4.43 million. Management said the cash held by the PRC subsidiary was considered indefinitely reinvested and not expected to be available for parent-company payments.
At June 30, cash and cash equivalents were $4.43 million; current assets were $69.01 million and current liabilities $11.87 million. Total assets were $146.03 million and total liabilities $25.08 million. Net trade receivables were $35.90 million, against a doubtful-account allowance of $24.50 million (up from $13.30 million at year-end). Inventory was $20.96 million, net of a $7.97 million obsolescence reserve.
Debt comprised $4.87 million in short-term notes and a $13.00 million construction loan, or approximately $17.87 million combined. The revolving credit line was fully drawn and personally guaranteed by the CEO and board chair. The construction facility was also fully drawn, bears 7.205% interest subject to annual adjustment, and requires interest-only payments for two years; principal installments begin July 2015.
Changes versus prior comparable periods
- Revenue fell 24% in Q2 and 19% in the first half. Management attributed the decline principally to suspension of the two injectable production lines after the company missed the new GMP upgrade deadline, as well as more selective credit sales.
- Injectable-dependent CNS/cerebral/cardiovascular sales fell 50% in Q2 and 54% in the first half. Anti-infection/respiratory sales increased 2% in Q2 and 5% in the first half.
- Gross margin improved to 39% in Q2 and 38% for the first half. Management cited lower raw-material purchase costs, higher prices for some products, and a more favorable product mix. The prior-year first-half margin was depressed by a $3.72 million inventory-obsolescence charge; excluding that charge, management estimated prior-year gross margin at 26%.
- Bad-debt expense rose to $8.03 million in Q2 and $11.34 million in the first half, versus $4.75 million and $4.63 million, respectively. R&D expense also increased, to $1.90 million in Q2 and $2.35 million for the first half, mainly due to new-line testing and contract milestones.
- Accounts receivable net of allowance declined from $45.15 million at December 31, 2013 to $35.90 million; management attributed the change to collections and the larger allowance. It reported $33.9 million of receivables more than 90 days past due, and 35.6% of receivables in the over-720-day aging bucket.
Outlook, risks and unusual items
- The old injectable lines were suspended beginning January 1, 2014. New lines were installed and undergoing testing and commissioning; the company submitted its new GMP certificate application at the end of June and expected certification in approximately three to six months. The required CFDA site review was postponed after the July typhoon and rescheduled for mid-August.
- A July 18, 2014 typhoon damaged manufacturing facilities and inventory. The initial estimated loss exceeded $3.25 million, subject to further assessment; management expected only minor insurance compensation. The old plant returned to operation at the end of July.
- Management expected operating cash flow to cover operating needs and anticipated capital expenditures over the next 12 months, but warned that changed circumstances could require additional capital or spending reductions. Additional financing, if sought, might not be available on acceptable terms.
- Management cited stricter CFDA approval criteria and longer timelines for pipeline products, pricing pressure, healthcare-market policy changes, and slow customer payments as risks. The company’s sales and assets are predominantly RMB-denominated, and PRC currency-conversion and remittance controls may limit transfers to the parent. Two customers represented 26.1% of accounts receivable at June 30.
- The company had approximately $5.42 million of future formula-approval contract payments due upon completion of phases over approximately four years. It reported no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Progress and timing of GMP certification, the postponed CFDA inspection, and resumption of injectable production.
- Final typhoon damage assessment, insurance recovery, and any impact on operations or inventory.
- Receivable aging, subsequent collections, customer concentration, and the adequacy of the $24.50 million allowance.
- Whether operating cash generation can support construction, product-development commitments, debt service, and the stated 12-month liquidity outlook.
- That first-half comparative revenue is $16.28 million in the financial statements; the MD&A contains a different approximate prior-year figure.