China Pharma Holdings, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The interim financial statements are unaudited. China Pharma develops, manufactures and sells generic and branded pharmaceuticals in China; all operations are conducted in the PRC.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $21.0 million | $18.7 million | $58.7 million | $50.4 million |
| Gross profit | $7.5 million | $7.6 million | $21.7 million | $20.8 million |
| Gross margin | 35.8% | 40.8% | 37% | 41% |
| Operating income | $3.9 million | $6.2 million | $15.0 million | $17.0 million |
| Net income | $3.3 million | $5.9 million | $13.5 million | $16.9 million |
| Diluted EPS | $0.08 | $0.14 | $0.31 | $0.39 |
Cash flow: Nine-month operating cash flow was $5.4 million, versus $6.1 million a year earlier. Investing activities used $4.7 million, principally for drug formulas and other asset purchases; financing provided $0.35 million, comprising a related-party loan. Cash increased $1.16 million to $4.85 million.
Balance sheet at September 30, 2011: Total assets were $149.1 million; current assets, $106.2 million; current liabilities, $13.2 million; and stockholders’ equity, $135.9 million. Short-term notes payable were $3.91 million, with no remaining availability under the renewed bank credit line. Trade receivables were $68.7 million, inventory $26.6 million, and cash plus banker’s acceptances $4.98 million. Management said $3.60 million of cash was considered indefinitely reinvested in the PRC subsidiary and not expected to be available for parent-company payments or dividends.
Changes versus the prior comparable period
- Q3 revenue increased 12%, but gross profit slipped 1%; gross margin fell five percentage points to 35.8%. Operating income decreased 37% and net income decreased 44%.
- Nine-month revenue increased 16.5%, while gross profit rose about 4%; operating income declined 12% and net income declined 20%.
- Management attributed profit pressure chiefly to lower margins, higher operating expenses and a change in amortization timing. The change increased nine-month amortization expense by $1.80 million. Selling expense rose 124% in Q3 and general and administrative expense rose 208%.
- Revenue growth was led by Anti-Viro/Infection & Respiratory and Digestive products. In the first nine months, those categories grew 33% each; the “Other” category declined 20%.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided. Management expects pricing pressure, particularly on antibiotics and essential-drug-list products, to continue. It expects new products, including Candesartan and Rosuvastatin, to support margins after launch, subject to regulatory approval.
- Healthcare-reform implementation and pricing effects vary by province. Management also cites seasonal sales patterns, with fourth-quarter revenue typically higher and first-quarter revenue lower.
- The company had 20 commercialized products and nine drugs in different stages of the SFDA registration process. Candesartan was awaiting final production approval; Rosuvastatin’s production-approval application had been submitted; a combination antibiotic was in Phase II trials.
- Receivables increased $6.8 million since year-end. $48.8 million was more than 90 days old; the filing reports that 45.7% was aged 180–720 days. Management says customers often pay late and reports no historical write-offs, but collection remains a focus. One customer represented 21.7% of nine-month sales and 10.1% of receivables at quarter-end.
- All revenue is denominated in RMB. PRC rules on currency conversion and remittance may limit transfers outside China. The company also identifies PRC political, economic, regulatory and tax risks. Its PRC income-tax rate is 15% through 2013 and is scheduled to rise to 25% in 2014 and after.
- Warrants associated with a derivative liability expired unexercised in May 2011. A $0.93 million derivative gain was recorded for the nine months, with no Q3 gain; the comparable 2010 nine-month gain was $1.80 million.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting. No material off-balance-sheet arrangements or commitments outside ordinary business were reported.
Important facts for investors to verify
- Whether the $68.7 million receivables balance and its older aging buckets are being collected as expected, and whether customer concentration has changed.
- The assumptions and prospective effect of the revised amortization timing, including the reported $1.80 million increase in nine-month expense.
- Whether pricing and product mix continue to reduce margins, and whether pending SFDA approvals result in launches on management’s anticipated timetable.
- How much cash is practically accessible to the parent given PRC remittance restrictions and the indefinitely reinvested balance.
- The filing’s cash-flow discussion contains inconsistent labeling of certain investing line items; verify the underlying cash-flow statement for the precise allocation of expenditures.