The statements contained in this report with respect to our financial condition,
results of operations and business that are not historical facts are
forward-looking statements. Forward-looking statements can be identified by the
use of forward-looking terminology, such as "anticipate," "believe," "expect,"
"plan," "intend," "seek," "estimate," "project," "could," or the negative
thereof or other variations thereon, or by discussions of strategy that involve
risks and uncertainties. Management wishes to caution the readers that any such
forward-looking statements contained in this report reflect our current beliefs
with respect to future events and involve known and unknown risks, uncertainties
and other factors, including, but not limited to, economic, competitive,
regulatory, technological, key employees, and general business factors affecting
our operations, markets, growth, services, products, licenses and other factors,
some of which are described in this report and some of which are discussed in
our other filings with the Securities and Exchange Commission (the "SEC"). These
forward-looking statements are only estimates or predictions. No assurances can
be given regarding the achievement of future results, as actual results may
differ materially as a result of risks facing our company, and actual events may
differ from the assumptions underlying the statements that have been made
regarding anticipated events.
These risk factors should be considered in connection with any subsequent
written or oral forward-looking statements that we or persons acting on our
behalf may issue. All written and oral forward-looking statements made in
connection with this report that are attributable to our company or persons
acting on our behalf are expressly qualified in their entirety by these
cautionary statements. Given these uncertainties, we caution investors not to
unduly rely on our forward-looking statements. We do not undertake any
obligation to review or confirm analysts' expectations or estimates or to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events, except as required by applicable law or
regulation.
Business Overview & Recent Developments
We are principally engaged in the development, manufacture and marketing of
pharmaceutical products for human use in connection with a variety of
high-incidence and high-mortality diseases and medical conditions prevalent in
the People's Republic of China (the "PRC"). All of our operations are conducted
in the PRC, where our manufacturing facilities are located. We manufacture
pharmaceutical products in the form of dry powder injectables, liquid
injectables, tablets, capsules, and cephalosporin oral solutions. The majority
of our pharmaceutical products are sold on a prescription basis and all of them
have been approved for at least one or more therapeutic indications by the
National Medical Products Administration (the "NMPA", formerly China Food and
Drug Administration, or CFDA) based upon demonstrated safety and efficacy.
China's consistency evaluation of generic drugs continues to proceed in the
first nine months ended September 30, 2022. The supporting policies from central
and provincial governments are constantly issued, including polices regarding
consistency evaluation for injectable products. We have always taken the task of
promoting the consistency evaluation as our top priority, and worked on them
actively. However, due to the continuous dynamic changes of the detailed
policies, future market, expected investment, and return of investment ("ROI")
for each drug's consistency evaluation, entities in the whole industry,
including us, have been making slow progresses in terms of the consistency
evaluation. We have a product that passed biological equivalents experiments of
consistency evaluation in March 2021. We have submitted application documents to
NMPA at the end of 2021, and passed the clinical verification of the drug by
NMPA in June 2022. We had completed the supplementary documents as required by
the NMPA in early November 2022 and are waiting for on-site verification.
We have taken a more cautious and flexible attitude towards initiating and
progressing any project for existing products' consistency evaluation to cope
with the changing macro environment of drug sales in China. Since "4 + 7"
(refers to 11 selected pilot cities, including 4 municipalities and 7 other
cities) trial Centralized Procurement ("CP") activities initiated in 2018, eight
rounds of CP activities have been carried out by September 2022, which
significantly reduced the price of the drugs that won the bids. In addition, the
consistency evaluation has been adopted as one of the qualification standards
for participating in the CP activities. As a result, we need to balance at least
the two factors above (namely, the investment of financial resources and time to
obtain the qualification of CP, and the sharp decline in the price of drugs
included in CP) before making decisions for any products.
18
In addition, we continue to explore the field of comprehensive healthcare.
Comprehensive healthcare is a general concept proposed according to the
development of the times, social needs and changes in disease spectrum.
According to the Outline of "Healthy China 2030" issued by Chinese government in
October 2016, the total size of China's health service industry will reach RMB
16 trillion (approximately 2.5 trillion) by 2030. This industry focuses on
people's daily life, aging and disease, pays attention to all kinds of risk
factors and misunderstandings affecting health, calls for self-health
management, and advocates the comprehensive care throughout the entire process
of life. It covers all kinds of health-related information, products and
services, as well as actions taken by various organizations to meet the health
needs. We launched Noni enzyme, a natural, Xeronine-rich antioxidant food
supplement at the end of 2018. We also launched wash-free sanitizers and masks
in 2020 to address the market needs caused by COVID-19 in China. With the impact
of COVID-19 continuing, masks and sanitizers have become long-time anti-epidemic
materials. We have sufficient production capacity for medical masks, surgical
masks and KN95 masks, which meets the personal needs for protection against the
epidemic outbreak.
We will continue to optimize our product structure and actively respond to the
current health needs of human beings.
Market Trends
As a generic drug company, we are presented with a huge domestic market. We
believe that through further upgrades and optimization, Chinese consistency
evaluations will have better conformity with European and American production
standards, and we will be able to export our products to overseas markets. In
China's market, we believe that in the future, cost management and control
ability will gradually become an important factor in determining the
competitiveness of generic pharmaceutical enterprises. Although price control
leads to a decline in the profitability, the CP's winning enterprise has a good
chance of achieving price-for-volume to increase its market share and support
its continuous innovation transformation. On a separate note, consumption
upgrading in China drives the increase of optional consumption. With the
improvement of residents' quality of life, the healthcare demand is also
changing. We believe that there is a large number of unmet demands in
comprehensive healthcare and Internet healthcare sectors.
In addition, the Office of the State Council issued "Pilot Plan for Marketing
Authorization Holders" on May 24, 2016, allowing eligible drug research and
development institutions and scientific researchers to become Marketing
Authorization Holders ("MAH") by obtaining drug marketing authorization and drug
approval numbers from the State Council. This policy uses a management model of
separating drug marketing authorization and drug production licenses, thereby
allowing an MAH to produce pharmaceuticals themselves or to consign production
to other pharmaceutical manufacturers. This policy not only transits China's
production practices to meet the European and United States standards by
separating drug approval and production qualifications, thereby changing the
existing model of bundling drug approval numbers to pharmaceutical manufacturers
in China, but also serves as a supplement to the ongoing consistency evaluations
policy.
In general, demand for pharmaceutical products is still experiencing steady
growth in China. We believe the ongoing generic drug consistency evaluations and
reform of China's drug production registration and review policies will have
major effects on the future development of our industry and may change its
business patterns. We will continue to actively adapt to the national policy
guidance and further evaluate market conditions for our existing products, then
adjust and compete in the market in order to optimize our development strategy.
19
Results of operations for the three months ended September 30, 2022
Revenue
Revenue was both $2.0 million for the three months ended September 30, 2022 and
2021, respectively.
Set forth below are our revenues by product category in millions (USD) for the
three months ended September 30, 2022 and 2021, respectively:
Three Months Ended
September 30, Net %
Product Category 2022 2021 Change Change
CNS Cerebral & Cardio Vascular 0.51 0.56 -0.05 -9 %
Anti-Viral/ Infection & Respiratory 1.03 0.92 0.11 12 %
Digestive Diseases 0.12 0.10 0.02 20 %
Other 0.30 0.39 -0.09 -23 %
The revenue of our "Anti-Viral/ Infection & Respiratory" product category was
$1.03 million in the three months ended September 30, 2022, as compared to $0.92
million in the same period last year. This increase was mainly due to the
increase in sales of Roxithromycin Dispersible Tablet.
"CNS Cerebral & Cardio Vascular" product category generated $0.51 million in
sales revenue in the three months ended September 30, 2022 compared to $0.56
million for the same period last year, which represented a decrease of $0.05
million. This decrease was mainly due to the decrease in sales of Alginic Sodium
Diester Injection.
"Others" product category generated $0.30 million in sales revenue in the three
months ended September 30, 2022 compared to $0.39 million for the same period
last year, which represented a decrease of $0.09 million. This decrease was
mainly due to the decrease in sales of Vitamin B6 for Injection.
Our "Digestive Diseases" product category generated $0.12 million and $0.10
million in the three months ended September 30, 2022 and 2021, respectively,
which are comparable.
Three Months Ended
September 30,
Product Category 2022 2021
CNS Cerebral & Cardio Vascular 26 % 28 %
Anti-Viral/ Infection & Respiratory 53 % 47 %
Digestive Diseases 6 % 5 %
Other 15 % 20 %
For the three months ended September 30, 2022, revenue breakdown by product
category showed a few changes to that of the same period in 2021. Sales of the
"CNS Cerebral & Cardio Vascular" product category represented 26% and 28% of
total revenue in the three months ended September 30, 2022 and 2021,
respectively. The "Anti-Viral/Infection & Respiratory" products category
represented 53% and 47% of total sales in the three months ended September 30,
2022 and 2021, respectively. The "Digestive Diseases" product category
represented 6% and 5% of total revenue in the three months ended September 30,
2022 and 2021, respectively. The "Other" product category represented 15% and
20% of revenues in the three months ended September 30, 2022 and 2021,
respectively.
20
Cost of Revenue
For the three months ended September 30, 2022, our cost of revenue was $2.1
million, or 107% of total revenue, comparing to $2.3 million, or 115% of total
revenue, for the same period in 2021. The decrease of cost in the three months
ended September 30, 2022 was mainly because that the cost of the product
portfolios sold in this quarter is lower than that in the same period last year.
Gross loss and Gross Loss Margin
Gross loss for the three months ended September 30, 2022 was $0.14 million, as
compared to $0.30 million during the same period in 2021. Our gross loss margin
in the three months ended September 30, 2022 was 7% as compared to 15% during
the same period in 2021.
Selling Expenses
Our selling expenses for the three months ended September 30, 2022 and 2021 were
$0.26 million and $0.13 million, respectively. Selling expenses accounted for
13.2% of the total revenue in the three months ended September 30, 2022, as
compared to 6.8% during the same period in 2021. The increase in selling
expenses was mainly because the sales activities in the first nine months of
this year occurred fairly evenly, while in the same period of last year, the
sales activities mainly occurred in the first half of that year.
General and Administrative Expenses
Our general and administrative expenses were $0.28 million and $0.30 million for
the three months ended September 30, 2022 and 2021, respectively. General and
administrative expenses accounted for 14.1% and 15.3% of our total revenues in
the three months ended September 30, 2022 and 2021, respectively.
Research and Development Expenses
Our research and development expenses for the three months ended September 30,
2022 were $0.09 million, as compared to $0.02 million in the same period in
2021. Research and development expenses accounted for 4.5% and 1.1% of our total
revenues in the three months ended September 30, 2022 and 2021, respectively.
These expenditures were mainly used for the consistency evaluations of our
existing products.
Bad Debt Expenses (Benefit)
Our bad debt benefit for the three months ended September 30, 2022 was $73,836,
as compared to bad debt expense of $8,372 for the same period in 2021.
Our customers are primarily pharmaceutical distributors that sell our products
to mostly government-backed hospitals. Therefore, the aging of our receivables
from our customers tends to be longer-term.
The amount of accounts receivable that was past due (or the amount of accounts
receivable that was more than 180 days old) was $0.03 million as of September
30, 2022, as compared to $0.11 million as of December 31, 2021.
21
The following table illustrates our accounts receivable aging distribution in
terms of percentage of total accounts receivable as of September 30, 2022 and
December 31, 2021:
September 30, December 31,
2022 2021
1 - 180 Days 2.5 % 2.7 %
180 - 360 Days 0.2 % 0.2 %
360 - 720 Days 0.1 % 0.4 %
> 720 Days 97.2 % 96.7 %
Total 100.0 % 100.0 %
Since the fourth quarter of 2018, our bad debt allowance estimate has been
updated to a policy which requires no allowance of accounts receivable
recognized that is within 180 days old, 10% of accounts receivable that is
between 180 days and 365 days old, 70% of accounts receivable that is between
365 days and 720 days old, and 100% of accounts receivable that is greater than
720 days old. Prior to that, our policy was to recognize no allowance of
accounts receivable that is within 90 days old, 10% of accounts receivable that
is between 90 days and 365 days old, 70% of accounts receivable that is between
365 days and 720 days old, and 100% of accounts receivable that is greater than
720 days old.
We recognize bad debt expenses per actual write-offs as well as changes of
allowance for doubtful accounts. To the extent that our current allowance for
doubtful accounts is higher than that of the previous period, we recognize a bad
debt expense for the difference during the current period, and, when the current
allowance is lower than that of the previous period, we recognize a bad debt
benefit for the difference. The allowance for doubtful accounts was $16.4
million as of September 30, 2022 and $18.3 million as of December 31, 2021. The
changes in the allowances for doubtful accounts during the three months ended
September 30, 2022 and 2021 were as follows:
For the Three Months Ended
September 30,
2022 2021
Balance, Beginning of Period $ 17,384,884 $ 18,316,990
Bad debt expense (73,836) 8,372
Foreign currency translation adjustment (881,932) (71,417 )
Balance, End of Period $ 16,429,116 $ 18,253,945
Loss from Operations
Our operating loss for the three months ended September 30, 2022 was $0.7
million, compared to $0.8 million during the same period in 2021.
Net Interest Expense
Net interest expense was $0.10 million for the three months ended September 30,
2022 and $0.06 million for the same period in 2021.
22
Net Loss
Net loss was both $0.8 million for the three months ended September 30, 2022 and
2021, respectively.
Loss per basic and diluted common share was both $0.02 for the three months
ended September 30, 2022 and 2021, respectively.
The number of basic and diluted weighted-average outstanding shares used to
calculate loss per share was 50,016,129 for the three months ended September 30,
2022, and 46,000,427 for the three months ended September 30, 2021.
Results of operations for the nine months ended September 30, 2022
Revenue
Revenue was $5.2 million and $6.8 million for the nine months ended September
30, 2022 and 2021, respectively.
Set forth below are our revenues by product category in millions (USD) for the
nine months ended September 30, 2022 and 2021, respectively:
Nine Months Ended
September 30, Net %
Product Category 2022 2021 Change Change
CNS Cerebral & Cardio Vascular 1.35 1.93 -0.58 -30 %
Anti-Viral/ Infection & Respiratory 2.77 3.50 -0.73 -21 %
Digestive Diseases 0.29 0.27 0.02 7 %
Other 0.77 1.01 -0.24 -24 %
The most significant revenue decrease in terms of dollar amount was in our
"Anti-Viral/ Infection & Respiratory", which generated $2.77 million in sales
revenue in the nine months ended September 30, 2022 compared to $3.50 million in
the same period last year, a decrease of $0.73 million. This decrease was mainly
due to sales decrease of Cefaclor Dispersible Tablets.
Our "CNS Cerebral & Cardio Vascular" product category generated $1.35 million in
sales revenue in the nine months ended September 30, 2022, compared to $1.93
million in the same period last year, which represented a decrease of $0.58
million that was mainly caused by decrease in sales of Alginic Sodium Diester
Injection.
Sales of our "Digestive Diseases" product category generated $0.29 million and
$0.27 million in the nine months ended September 30, 2022 and 2021,
respectively, which are comparable.
Sales of "Other" product category generated $0.77 million and $1.01 million in
sales revenue in the nine months ended September 30, 2022 and 2021,
respectively. The decrease was mainly caused by the decrease in sales of Vitamin
B6.
Nine Months Ended
September 30,
Product Category 2022 2021
CNS Cerebral & Cardio Vascular 26 % 29 %
Anti-Viral/ Infection & Respiratory 53 % 52 %
Digestive Diseases 6 % 4 %
Other 15 % 15 %
For the nine months ended September 30, 2022, revenue breakdown by product
category remained similar to that of the same period in 2021. Sales of the "CNS
Cerebral & Cardio Vascular" category represented 26% and 29% of total revenue
for the nine months ended September 30, 2022 and 2021, respectively. The
"Anti-Viral/Infection & Respiratory" products category represented 53% and 52%
of total sales for the nine months ended September 30, 2022 and 2021,
respectively. The "Digestive Diseases" category represented 6% and 4% of total
revenue for the nine months ended September 30, 2022 and 2021. And the "Other"
category represented both 15% of revenues for the nine months ended September
30, 2022 and 2021, respectively.
23
Cost of Revenue
For the nine months ended September 30, 2022, our cost of revenue was $5.7
million, or 110.4% of total revenue, comparing to $6.7 million, or 99.3% of
total revenue, for the same period in 2021. The increase in the proportion of
cost to revenue in the nine months ended September 30, 2022 was mainly due to
the amount of fixed cost does not decrease with the decline of revenue compared
to the same period last year.
Gross Profit (loss) and Gross Profit (Loss) Margin
Gross loss for the nine months ended September 30, 2022 was $0.5 million,
compared to a gross profit of $0.05 million in the same period in 2021. Our
gross loss margin in the nine months ended September 30, 2022 was 10.4% compared
to a gross profit margin of 0.7% in the same period in 2021. The decrease in our
gross margin for the nine months ended September 30, 2022 was mainly due to the
decrease of revenue, and the fact that the amount of fixed cost does not
decrease with the decline of revenue compared to the same period last year.
Selling Expenses
Our selling expenses for the nine months ended September 30, 2022 and 2021 were
$0.7 million and $1.0 million, respectively. Selling expenses accounted for
13.6% of the total revenue in the nine months ended September 30, 2022 compared
to 14.2% in the same period in 2021.
General and Administrative Expenses
Our general and administrative expenses were $1.06 million for the nine months
ended September 30, 2022, as compared to $1.04 million in the same period in
2021. Our general and administrative expenses accounted for 20.5% and 15.4% of
our total revenues in the nine months ended September 30, 2022 and 2021,
respectively.
Research and Development Expenses
Our research and development expenses for the nine months ended September 30,
2022 and 2021 were $0.16 million and $0.26 million, respectively, representing a
decrease of $0.10 million compared to the same period of last year.
Bad Debt Benefit
Our bad debt benefit was $83,715 for the nine months ended September 30, 2022,
and $4,593 for the nine months ended September 30, 2021.
The changes in the allowances for doubtful accounts during the nine months ended
September 30, 2022 and 2021 were as follows:
For the Nine Months Ended
September 30,
2022 2021
Balance, Beginning of Period $ 18,312,707 $ 18,150,943
Bad debt expense (83,715 ) (4,593 )
Foreign currency translation adjustment (1,799,876 ) 107,595
Balance, End of Period $ 16,429,116 $ 18,253,945
24
Loss from Operations
Our operating loss for the nine months ended September 30, 2022 was $2.4
million, compared to $2.2 million in the same period in 2021.
Net Interest Expense
Net interest expense for the nine months ended September 30, 2022 was $0.33
million, compared to $0.21 million for the same period in 2021.
Net Loss
Net loss for the nine months ended September 30, 2022 was $2.7 million, as
compared to net loss of $2.4 million for the nine months ended September 30,
2021. The increase in net loss for the nine months ended September 30, 2022 was
mainly due to the decrease in sales price and gross profit.
For the nine months ended September 30, 2022, loss per basic and diluted common
share was $0.06, compared to loss per basic and diluted common share of $0.05
for the nine months ended September 30, 2021.
The number of basic and diluted weighted-average outstanding shares used to
calculate loss per share was 48,634,003 for the nine months ended September 30,
2022, and 45,579,557 for the nine months ended September 30, 2021.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated from operations, bank lines
of credit and the Convertible Note Payable. Currently the Company has not
witnessed or expected to encounter any difficulties to refinance those lines of
credit this year. In addition to the aggregated advance of $1,425,123 from our
CEO as of December 31,2021, we received some temporary advances from and made
several repayments to her in the three months ended September 30, 2022. As of
September 30, 2022, the aggregated advance from our CEO was $1,093,976 for use
in operations. Our cash and cash equivalents were $2.1 million, representing
12.9% of our total assets, as of September 30, 2022, as compared to $4.9
million, representing 21.5% of our total assets as of December 31, 2021. All of
the $2.1 million of cash and cash equivalents as of September 30, 2022 are
considered to be reinvested indefinitely in the Company's Chinese subsidiary,
Helpson and are not expected to be available for payment of dividends or for
other payments to its parent company or to its shareholders.
The Company obtained various lines of credit in details described under Note 7
to its condensed consolidated financial statements contained in this report
which is incorporated by reference herein.
The Company issued a convertible note to an institutional accredited investor as
disclosed in Note 8 to the condensed consolidated financial statements contained
in this report which is incorporated by reference herein.
Although the Company obtained the convertible note and additional lines of
credit in 2021, there can be no assurance that the Company will be able to
achieve its future strategic goal to accelerate the launch of nutrition
products. This raises substantial doubt about the Company's ability to continue
as a going concern. Although our Chairperson and Chief Executive Officer had
advanced funds for working capital during the year ended December 31, 2021,
there can be no assurances that this will be the case in the future. We may seek
additional debt or equity financing as necessary when we believe the market
conditions are the most advantageous to us and/or require us to reduce certain
discretionary spending, which could have a material adverse effect on our
ability to achieve our business objectives. There can be no assurance that any
additional financing will be available on acceptable terms, if at all.
25
Operating Activities
Net cash used in operating activities was $0.99 million in the nine months ended
September 30, 2022, as compared to $0.05 million for the same period in 2021.
Our net accounts receivable was $0.4 million and $0.7 million as of September
30, 2022 and December 31, 2021.
Total inventory was $2.9 million, as of September 30, 2022, and $3.3 million as
of December 31, 2021.
Investing Activities
Net cash used in investing activities was both $0.43 million for the nine months
ended September 30, 2022 and 2021, respectively.
Financing Activities
Cash flow used in financing activities was $1.10 million in the nine months
ended September 30, 2022, as compared to $0.02 million generated in the nine
months ended September 30, 2021. The financing activities that occurred in the
nine months ended September 30, 2022 were primarily repayment to financial
institutions.
According to relevant PRC laws, companies registered in the PRC, including our
PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of
their after-tax net income, as determined under the accounting standards and
regulations in the PRC, to statutory surplus reserve accounts until the reserve
account balances reach fifty percent (50%) of the companies' registered capital
prior to their remittance of funds out of the PRC. Allocations to these reserves
and funds can only be used for specific purposes and are not transferrable to
the parent company in the form of loans, advances or cash dividends. As of
September 30, 2022 and December 31, 2021, Helpson's net assets totaled
($267,000) and $3,447,000, respectively. Due to the restriction on dividend
distribution to overseas shareholders, the amount of Helpson's net assets that
was designated for general and statutory capital reserves, and thus could not be
transferred to our parent company as cash dividends, was 50% of Helpson's
registered capital, which was both $8,145,000 as of September 30, 2022 and
December 31, 2021, respectively. The amount that Helpson must set aside for the
statutory surplus fund accounts is 3,049% and 236% of its total net
assets. There were no allocations to the statutory surplus reserve accounts
during the nine months ended September 30, 2022.
The Chinese government also imposes controls on the conversion of RMB into
foreign currencies and the remittance of currencies out of China. Our businesses
and assets are primarily denominated in RMB. All foreign exchange transactions
take place either through the People's Bank of China or other banks authorized
to buy and sell foreign currencies at the exchange rates quoted by the People's
Bank of China. Approval of foreign currency payments by the People's Bank of
China or other regulatory institutions requires the submission of a payment
application form together with certain invoices and executed contracts. The
currency exchange control procedures imposed by Chinese government authorities
may restrict the ability of Helpson, our Chinese subsidiary, to transfer its net
assets to our parent company through loans, advances or cash dividends.
Off-Balance Sheet Arrangements
As of September 30, 2022, we did not have any off-balance sheet arrangements.
Critical Accounting Policies
Management's discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. Our financial statements reflect the selection and application of
accounting policies that require management to make significant estimates and
judgments. The discussion of our critical accounting policies contained in Note
1 to our consolidated financial statements, "Organization and Significant
Accounting Policies", is incorporated herein by reference.
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CHINA PHARMA HOLDINGS, INC. 