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 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, the
whole industry, including us, has been making slow progress in terms of the
consistency evaluation. We have a product that passed biological equivalents
experiments of consistency evaluation in March 2021. And we've submitted
application documents to NMPA at the end of 2021.
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, six
rounds of CP activities have been carried out by the end of 2021, 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
these two factors above before making decisions for any products.
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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 more
than RMB 8 trillion (approximately $1.3 trillion) by 2020, and 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 better conformity with Chinese
consistency evaluations based on European and American production standards, 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 in order 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 itself or to consign production to
other pharmaceutical manufacturers. This policy not only transitions 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 undergoing 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
accordingly, and compete in the market in order to optimize our development
strategy.
Results of Operations for the three months ended March 31, 2022
Revenue
Revenue decreased by 32.0% to $1.6 million for the three months ended March 31,
2022, as compared to $2.4 million for the three months ended March 31, 2021.
This decrease was mainly due to the decline in the sales price of our main
products caused by the promotion of China's drug Centralized Procurement policy,
as well as the negative impact on drug sales triggered by quarantine, and
drug-sales-control polices caused by the scattered outbreak COVID-19 in the
first quarter of 2022 in China.
Set forth below are our revenues by product category in millions (USD) for the
three months ended March 31, 2022 and 2021:
Three Months Ended
March 31,
Product Category 2022 2021 Net Change % Change
CNS Cerebral & Cardio Vascular 0.28 0.50 -0.22 -44 %
Anti-Viral/ Infection & Respiratory 1.05 1.50 -0.45 -30 %
Digestive Diseases 0.06 0.09 -0.03 -31 %
Other 0.20 0.28 -0.08 -28 %
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The most significant revenue decrease in terms of dollar amount was in our
"Anti-Viral/ Infection & Respiratory" product category, which generated $1.05
million in sales revenue in the three months ended March 31, 2022 compared to
$1.50 million for the same period a year ago, which is a decrease of $0.45
million. This decrease was mainly due to the decrease in sales of Cefaclor
Dispersible Tablet and Roxithromycin, which was caused by the price and sales
volume pressure from Centralized Procurement on those products.
Our "CNS Cerebral & Cardio Vascular" product category generated $0.28 million in
sales revenue in the three months ended March 31, 2022 compared to $0.50 million
for the same period a year ago, which is a decrease of $0.22 million. This
decrease was mainly due to the decrease in sales of Alginic Sodium Diester
Injection, which was caused by market volatility.
Our "Others" product category generated $0.20 million of sales in the three
months ended March 31, 2022, compared to $0.28 million in the same period in
2021. This decrease was mainly due to the decrease in sales of Vitamin B6 for
Injection, which was caused by market volatility.
Our "Digestive" product category sales decreased by $0.03 million to $0.06
million in the three months ended March 31, 2022 from $0.09 million for the same
period in 2021, which was mainly due to the decrease in sales of Omeprazole and
Compound Ammonium Glycyrrhetate S for Injection that was caused by market
volatility.
Three Months Ended
March 31,
Product Category 2022 2021
CNS Cerebral & Cardio Vascular 18 % 22 %
Anti-Viral/ Infection & Respiratory 65 % 56 %
Digestive Diseases 4 % 5 %
Other 13 % 17 %
For the three months ended March 31, 2022, revenue breakdown by product category
showed certain changes to that of the same period in 2021. Sales of the
"Anti-Viral/Infection & Respiratory" products category represented 65% and 56%
of total sales in the three months ended March 31, 2022 and 2021, respectively.
The "CNS Cerebral & Cardio Vascular" product category represented 18% and 22% of
total revenue in the three months ended March 31, 2022 and 2021, respectively.
The "Other" product category represented 13% and 17% of revenues in the three
months ended March 31, 2022 and 2021, respectively. The "Digestive Diseases"
product category represented 4% and 5% of total revenue in the three months
ended March 31, 2022 and 2021, respectively.
Cost of Revenue
For the three months ended March 31, 2022, our cost of revenue was $1.8 million,
or 110.6% of total revenue, while cost of revenue was $2.1 million, or 88.4% of
total revenue, for the same period in 2021. The increase in the proportion of
cost to revenue in this quarter was mainly due to the fact that the amount of
fixed cost does not decrease with the decline of revenue.
Gross Profit and Gross Margin
Gross loss for the three months ended March 31, 2022 was $0.2 million, as
compared to gross profit of $0.3 million during the same period in 2021. For the
three months ended March 31, 2022, we had a gross loss margin of 10.6% as
compared to a gross profit margin of 11.6% during the same period in 2021.
Selling Expenses
Our selling expenses for the three months ended March 31, 2022 and 2021 were
$0.2 million and $0.4 million, respectively. Selling expenses accounted for
11.2% of the total revenue in the three months ended March 31, 2022, as compared
to 16.0% during the same period in 2021. As a result of the adjustment of many
policies of healthcare reform, we had reduced the number of personnel and
expenses to efficiently support our sales and the collection of accounts
receivable.
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General and Administrative Expenses
Our general and administrative expenses were $0.5 million and $0.4 million for
the three months ended March 31, 2022 and 2021, respectively. It accounted for
32.1% and 17.3% of our total revenues in the three months ended March 31, 2022
and 2021, respectively.
Research and Development Expenses
Our research and development expenses for the three months ended March 31, 2022
were $0.05 million, as compared to $0.19 million in the same period in 2021.
Research and development expenses accounted for 3.4% and 8.1% of our total
revenues in the three months ended March 31, 2022 and 2021, respectively. These
expenditures were mainly for the consistency evaluations of our existing
products.
Bad Debt Benefit
Our bad debt benefit for the three months ended March 31, 2022 was $5,521, as
compared to $8,221 for the same period in 2021. This change was mainly due to
the accelerated rate of receipts of accounts receivable aged within two years of
the current period.
In general, our normal customer credit or payment terms are 180 days. This has
not changed in recent years. Due to the peculiar environment affecting the
Chinese pharmaceutical market, deferred payments to pharmaceutical companies by
state-owned hospitals and local medicine distributors are common.
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 and $0.11 million
as of March 31, 2022 and December 31, 2021, respectively.
The following table illustrates our accounts receivable aging distribution in
terms of percentage of total accounts receivable as of March 31, 2022 and
December 31, 2021:
March 31, December 31,
2022 2021
1 - 180 Days 2.08 % 2.68 %
180 - 360 Days 0.10 % 0.17 %
360 - 720 Days 0.20 % 0.41 %
> 720 Days 97.62 % 96.74 %
Total 100.00 % 100.00 %
Our bad debt allowance estimate practice is that we consider accounts receivable
balances aged within 180 days current, except for any individual uncollectible
account assessed by management. We account for the following respective
percentage as bad debt allowance based on age of the accounts receivables: 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.
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
credit for the difference. The allowance for doubtful account balances were
$18.4 million and $18.2 million as of March 31, 2022 and December 31, 2021,
respectively. The changes in the allowances for doubtful accounts during the
three months ended March 31, 2022 and 2021 were as follows:
For the Three Months Ended
March 31,
2022 2021
Balance, Beginning of Period $ 18,312,707 $ 18,150,493
Bad debt expense (benefit) (5,521 ) (8,221 )
Foreign currency translation adjustment 77,456 (128,933 )
Balance, End of Period $ 18,384,642 $ 18,013,339
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Loss from Operations
Our operating loss for the three months ended March 31, 2022 was $0.9 million,
compared to an operating loss of $0.7 million during the same period in 2021.
Net Interest Expense
Net interest expense for the three months ended March 31, 2022 was $0.12
million, as compared to $0.07 million for the same period in 2021.
Net Loss
Net Loss for the three months ended March 31, 2022 was $1.0 million, as compared
to a net loss of $0.7 million for the same period a year ago. The increase in
net loss was mainly the result of decreased revenue and increased cost in this
period.
Loss per basic and diluted common share were both $0.02 for the three months
ended March 31, 2022 and 2021, respectively.
The number of basic and diluted weighted-average outstanding shares used to
calculate loss per share was 47,368,111 and 45,579,557 for the three months
ended March 31, 2022 and 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 line 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 March 31, 2022. As of March
31, 2022, the aggregated advance from our CEO was $1,202,472 for use in
operations. Our cash and cash equivalents were $3.7 million, representing 17.7%
of our total assets, as of March 31, 2022, as compared to $4.9 million,
representing 21.5% of our total assets as of December 31, 2021. All of the $3.7
million of cash and cash equivalents as of March 31, 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.
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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 and
for the three months ended March 31, 2022, 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.
Operating Activities
Net cash used by operating activities was $0.9 million in the three months ended
March 31, 2022, compared to net cash flow of $0.3 million used by operating
activities in the same period in 2021.
As of March 31, 2022, our net accounts receivable was $0.4 million, compared to
$0.7 million as of December 31, 2021.
Total inventory was $3.9 million and $3.3 million as of March 31, 2022 and
December 31, 2021, respectively.
Investing Activities
There was $1,391 cash flow under investing activities during the three months
ended March 31, 2022, compared to zero for the same period in 2021.
Financing Activities
Cash flow used in financing activities was $0.28 million in the three months
ended March 31, 2022; compared to $0.15 million cash used in the same period
2021.
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
March 31, 2022 and December 31, 2021, Helpson's net assets totaled $2,883,000
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 is both $8,145,000 as of March 31, 2022 and December 31, 2021,
respectively. Since the amount that Helpson must set aside for the statutory
surplus fund only accounts for 283% and 236%, respectively, of its total net
assets, this reserve does not have a major impact on our liquidity. There were
no allocations to the statutory surplus reserve accounts during the year ended
March 31, 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 Helpson, our Chinese subsidiary, from transferring its net assets
to our parent company through loans, advances or cash dividends.
Off-Balance Sheet Arrangements
As of March 31, 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 United States generally accepted accounting
principles. Our financial statements reflect the selection and application of
accounting policies which 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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