CHINA PHARMA HOLDINGS, INC. - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One) 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ____________ to ____________

Commission File Number 001-34471

CHINA PHARMA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

+86- 898-6681-1730 (China)

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 13, 2020, there were 43,579,557 shares of common stock, $0.001 par value per share, issued and outstanding.

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

CHINA PHARMA HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA PHARMA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA PHARMA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA PHARMA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations – China Pharma Holdings, Inc., a Nevada corporation, owns 100% of Onny Investment Limited (Onny), a British Virgin Islands corporation, which owns 100% of Hainan Helpson Medical & Biotechnology Co., Ltd (Helpson), a company organized under the laws of the People’s Republic of China (the PRC). China Pharma Holdings, Inc. and its subsidiaries are referred to herein as the Company.

Onny acquired 100% of the ownership in Helpson on May 25, 2005, by entering into an Equity Transfer Agreement with Helpson’s three former shareholders. The transaction was approved by the Commercial Bureau of Hainan Province on June 12, 2005 and Helpson received the Certificate of Approval for Establishment of Enterprises with Foreign Investment in the PRC on the same day. Helpson received its business license evidencing its WFOE (Wholly Foreign Owned Enterprise) status on June 21, 2005.

The Company has acquired and continues to acquire well-accepted medical formulas to add to its diverse portfolio of Western and Chinese medicines.

Liquidity and Going Concern

As of June 30, 2020, the Company had cash and cash equivalents of $1.8 million and an accumulated deficit of $26.6 million. The Company’s Chairperson, Chief Executive Officer and Interim Chief Financial Officer has advanced an aggregate of $0.8 million at June 30, 2020 to provide working capital and enable the Company’s required payments related to its construction loan facility. Although the Company recorded a profit in the three months ended June 30, 2020, operating losses are anticipated to continue for the foreseeable future due to, among other things, costs related to the production of its existing products, debt service costs and costs of selling and administrative organization. These conditions raise substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued. To alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern, management plans to enhance the sales model of advance payment, and further strengthen its collection of accounts receivable. Further, the Company is currently exploring strategic alternatives to accelerate the launch of nutrition products. In addition, management believes that the Company’s existing fixed assets can serve as collateral to support additional bank loans. As discussed in Note 8, in April 2020 the Company obtained a line of credit from a bank for an aggregate amount of RMB 10,000,000 (approximately $1.4 million), of which RMB 5,000,000 (approximately $0.7 million) have been advanced to the Company. Also, in June 2020 the Company obtained an additional line of credit and received advances totaling RMB 8,500,000 (approximately $1.2 million). While the current plans and additional financing will allow the Company to fund its operations in the next twelve months, there can be no assurance that the Company will be able to achieve its future strategic alternatives raising substantial doubt about its ability to continue as a going concern.

Pursuant to the requirements of Accounting Standards Codification (ASC) 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.

Under ASC 205-40, the strategic alternatives being pursued by the Company cannot be considered probable at this time because none of the Company’s current plans have been finalized at the time of the issuance of these financial statements and the implementation of any such plan is not probable of being effectively implemented as none of the plans are entirely within the Company’s control. Accordingly, substantial doubt is deemed to exist about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.

Consolidation and Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are expressed in United States dollars. They include the accounts and operations of the Company including its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

Helpson’s functional currency is the Chinese Renminbi. Helpson’s revenue and expenses are translated into United States dollars at the average exchange rate for the period. Assets and liabilities are translated at the exchange rate as of the end of the reporting period. Gains or losses from translating Helpson’s financial statements are included in accumulated other comprehensive income, which is a component of stockholders’ equity. Gains and losses arising from transactions denominated in a currency other than the functional currency of the entity that is party to the transaction are included in the results of operations.

In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated on consolidation. However, the results of operations included in such financial statements may not necessary be indicative of annual results. Such financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 30, 2020.

Accounting Estimates - The methodology used to prepare the Company’s financial statements is in conformity with U.S. GAAP, which requires the management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Therefore, actual results could differ from those estimates.

The Company uses the same accounting policies in preparing its quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

Credit Risk – The carrying amount of accounts receivable included in the balance sheet represents the Company’s exposure to credit risk in relation to its financial assets. No other financial asset carries a significant exposure to credit risk. The Company performs ongoing credit evaluations of each customer’s financial condition. The Company maintains allowances for doubtful accounts and such allowances in the aggregate have not exceeded management’s estimates.

The Company has its cash in bank deposits primarily at state owned banks located in the PRC. Historically, deposits in PRC banks have been secured due to the state policy of protecting depositors’ interests. The PRC promulgated a Bankruptcy Law in August 2006, effective June 1, 2007, which contains provisions for the implementation of measures for the bankruptcy of PRC banks. Company bank accounts in China are not subject to a certain insurance coverage and will follow the provisions set forth in the PRC Bankruptcy Law should any bank where the Company has accounts declare bankruptcy.

Interest Rate Risk – The Company is exposed to the risk arising from changing interest rates, which may affect the ability of repayment of existing debts and viability of securing future debt instruments within the PRC.

Reclassification – Certain amounts in the prior period presented have been reclassified to conform to the current year presentation. There was no impact on previously reported assets, net income or total cash flows.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The pronouncement will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not anticipate the guidance will have a material impact on its financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendment simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes. It also clarifies certain aspects of the existing guidance to promote more consistent application, among other things. The guidance is effective for interim and annual reporting periods beginning within 2021 with early adoption permitted.

From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of ASUs. Unless otherwise discussed, the Company believes that the recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on its consolidated financial statements upon adoption.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

NOTE 2 – INVENTORY

Inventory consisted of the following:

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:

Depreciation relating to office equipment was included in general and administrative expenses, while all other depreciation was included in cost of revenue. For the three months ended June 30, 2020 and 2019, depreciation expense was $640,473 and $762,475, respectively and $1,287,586 and $1,535,336 for the six months ended June 30, 2020 and 2019, respectively.

NOTE 4 - INTANGIBLE ASSETS

Intangible assets represent the cost of medical formulas approved for production by the National Medical Products Administration (the “NMPA”, formerly China Food and Drug Administration, CFDA). The Company did not obtain NMPA production approval for any new medical formulas during the six months ended June 30, 2020 and 2019 and no costs were reclassified from advances to intangible assets during the six months ended June 30, 2020 and 2019, respectively.

Approved medical formulas are amortized from the date NMPA approval is obtained over their individually identifiable estimated useful life, which range from ten to thirteen years.  It is at least reasonably possible that a change in the estimated useful lives of the medical formulas could occur in the near term due to changes in the demand for the drugs and medicines produced from these medical formulas. Amortization expense relating to intangible assets was $8,676 and $17,912 for the three months ended June 30, 2020 and 2019, respectively, and $17,484 and $40,534 for the six months ended June 30, 2020 and 2019, respectively, which was included in the general and administrative expenses. Medical formulas typically do not have a residual value at the end of their amortization period.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

The Company evaluates each approved medical formula for impairment at the date of NMPA approval, when indications of impairment are present and also at the date of each financial statement. The Company’s evaluation is based on an estimated undiscounted net cash flow model, which considers currently available market data for the related drug and the Company’s estimated market share. If the carrying value of the medical formula exceeds the estimated future net cash flows, an impairment loss is recognized for the excess of the carrying value over the fair value of the medical formula, which is determined by the estimated discounted future net cash flows. No impairment loss was recognized during the six months ended June 30, 2020 and 2019.

Intangible assets consisted solely of NMPA approved medical formulas as follows:

NOTE 5 – ADVANCES FOR PURCHASES OF INTANGIBLE ASSETS

In order to expand the number of medicines the Company manufactured and marketed, it entered into contracts with independent laboratories and others for the purchase of medical formulas and assistance with the NMPA approval process.

Under the new regulations and policy environment, the criteria for formulations’ development are more stringent. The Company must supplement and improve the corresponding processes and standards to meet the latest requirements of NMPA in accordance with the requirements of consistency evaluation. As a result, the Company anticipates an extended timeline on the approval process of its current pipeline products.

If a medical product is not approved by the NMPA, as evidenced by their issuance of a denial letter, or if the laboratory breaches the contract, the laboratory is required under the contract to provide a refund to the Company of the full amount of the payments made to the laboratory for that formula, or the Company can require the application of those payments to another medical formula with the same laboratory. As a result of the refund right, the Company is ultimately purchasing an approved medical product. Accordingly, payments made prior to the issuance of production approval by the NMPA are recorded as advances for purchases of intangible assets.

To date, no formula has failed to receive NMPA production approval nor has the Company been informed or been made aware of any formula that may fail to receive such approval. However, there is no assurance that the medical products will receive production approval, and if the Company does not receive such approval, it will enforce its contractual rights to receive a refund from the laboratory or have the payments applied to another medical formula with the same laboratory.

The management determined to impair all remaining advances at December 31, 2019, but may resume the development of these formulas in the future if sufficient funding and other favorable conditions arise.

NOTE 6 – RELATED PARTY TRANSACTIONS

A member of the Company’s board of directors (“Board”) had previously advanced to the Company an aggregate amount of $1,354,567 as of June 30, 2020 and December 31, 2019 which are recorded as “Other payables – related parties” on the accompanying condensed consolidated balance sheets. The advances bear interest at a rate of 1.0% per year.  Total interest expense for each of the three months ended June 30, 2020 and 2019 was $3,386 and $3,386, respectively. Total interest expense for each of the three months ended June 30, 2020 and 2019 was $6,773 and $6,773, respectively.

The Company received advances totaling $90,551 during the six months ended June 30, 2020 from its Chairperson, Chief Executive Officer and Interim Chief Financial Officer. Total amounts owed were $797,594 and $717,419 and are recorded as Other payables – related parties on the accompanying condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively. On July 8, 2019 the Company entered into a loan agreement in exchange for cash of RMB 4,770,000 ($674,405) with its Chairperson, Chief Executive Officer and Interim Chief Financial Officer. The loan bears interest at a rate of 4.35% and is payable within one year of the loan agreement. The due date of the loan agreement was extended to July 10, 2021. Total interest expense related to the loan for the three and six months ended June 30, 2020 was $7,321 and $14,754. Compensation payable to the Chairperson, Chief Executive Officer and Interim Chief Financial Officer is included in Other payables in the accompanying condensed consolidated balance sheets totaling $2,315,986 and $2,307,986 as of June 30, 2020 and December 31, 2019, respectively.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

NOTE 7 – BANKER’S ACCEPTANCE NOTES PAYABLE

In April 2016, the Company entered into a Banker’s Acceptance Note Agreement with a bank. Pursuant to the terms of the agreement, the Company can issue banker’s acceptance notes to any third party as payment of amounts owing to that third party. The Company is required to deposit with the bank an amount equal to the amounts represented by the banker’s acceptance notes issued to the third parties. The amount of these deposited balances is shown as “Restricted cash” on the accompanying balance sheets as of June 30, 2020 and December 31, 2019. The maximum amount that the Company can issue under this agreement is limited to the lesser of RMB30,000,000 (approximately $4.5 million) or the amount of cash available to deposit against the banker’s acceptance notes. In addition, the agreement calls for the payment of fees equal to 0.05% of the note amount to the bank. As of June 30, 2020 and December 31, 2019, the Company had outstanding banker’s acceptance notes in the amount of $222,996 and $109,908, respectively.

NOTE 8 – CONSTRUCTION LOAN FACILITY AND LINES OF CREDIT

Construction Loan Facility

The Company obtained a construction loan facility, dated June 21, 2013, in the aggregate amount of RMB 80,000,000 (approximately $13 million). The loan facility is for an eight-year term, which commenced on July 11, 2013, the initial draw-down date. The proceeds of the loan were used for and are collateralized by the construction of the Company’s new production facility and the included production line equipment and machinery. The loan bears interest based upon 110% of the PRC government’s eight-year term rate effective on the actual draw-down date, subject to annual adjustments based on 110% of the floating rate for the same type of loan on the anniversary from the draw-down date and its subsequent anniversary dates.  The interest rate has remained at 5.39% on the anniversary dates which were July 10, 2017, 2018 and 2019, respectively.  The loan required interest only payments for the first two years. Beginning July 11, 2015, the principal was due in at least two (2) annual installments with the first annual payment being due within six month period after July 10, 2015 and the second annual payment being due July 10, 2016 and each following year over the next five years through July 11, 2021 on the identical terms as described above for 2015. The Company has made all required payments due under the loan. As of June 30, 2020, the Company had no additional amounts available to it under this facility. During the six months ended June 30, 2020, the Company made principal payments in the amount of $143,286 (RMB 1,000,000). The Company made the required RMB 14,000,000 (approximately $2 million) payment due under the loan on July 10, 2020.

Lines of Credit

In April 2020, the Company obtained a line of credit from Postal Savings Bank of China for an aggregate amount of RMB 10,000,000 (approximately $1.4 million), of which RMB 5,000,000 (approximately $0.7 million) have been advanced through June 30, 2020. The loan bears interest at a rate of 4.25% per annum. Advances on the line of credit are due two years from the date of the advance. A third party company has guaranteed the loan as being a second priority creditor in the collateral in certain land use rights and buildings next to the creditor of the construction loan facility as discussed above. In addition, the Company’s Chief Executive Officer and Chair of the Board personally guaranteed the new line of credit. The Company has an additional RMB 5,000,000 (approximately $0.7 million) available under the line, subject to a risk review and approval by the third party guarantee company. Total interest expense under this facility for the three and six months ended June 30, 2020 was $4,953. In July 2020 an additional RMB 3,000,000 (approximately $0.4 million) has been advanced under this line of credit. The Company has an additional RMB 2,000,000 (approximately $0.3 million) available under the line, subject to a risk review and approval by the third party guarantee company.

On June 30, 2020 the Company obtained a line of credit with Bank of Communications for an aggregate amount of RMB 8,500,000 (approximately $1.2 million), all of which has been advanced. The loan bears interest at the rate of 4.05% per annum. The line of credit is due in one year on the anniversary date of the line of credit. In addition, the Company’s Chief Executive Officer and Chair of the Board personally guaranteed the new line of credit and pledged personal assets as collateral for the loan. Total interest for the three and six months ended June 30, 2020 was $0.

Principal payments required for the remaining terms of the loan facility and the lines of credit for the twelve month periods ended June 30, are as follows:

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

Fair Value of Construction Loan Facility and Lines of Credit – Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the carrying amounts of the construction loan facility outstanding as of June 30, 2020 and December 31, 2019 approximated their fair value because the underlying instrument bears an interest rate that approximated current market rates.

NOTE 9 - LEASES

The Company has leases for certain office and production facilities in the PRC which are classified as operating leases. The leases contain payment terms for fixed amounts. Options to extend are recognized as part of the lease liabilities and recognized as right to use assets when management estimates to renew the lease. There are no residual value guarantees, no variable lease payments, and no restrictions or covenants imposed by leases. The discount rate used in measuring the lease liabilities and right of use assets was determined by reviewing the Company’s incremental borrowing rate at the initial measurement date. For the three months ended June 30, 2020 and 2019, operating lease cost was $22,265 and $23,109, respectively and cash paid for amounts included in the measurement of lease liabilities for operating cash flows from operating leases was $23,665 and $24,562, respectively. For the six months ended June 30, 2020 and 2019, operating lease cost was $44,494 and $46,454, respectively and cash paid for amounts included in the measurement of lease liabilities for operating cash flows from operating leases was $47,292 and $49,376, respectively. As of June 30, 2020 and December 31, 2019, the Company reported operating lease right of use assets of $90,289 and $136,779, respectively and operating use liabilities of $93,510 and $140,007, respectively. As of June 30, 2020, its operating leases had a weighted average remaining lease term of 1.02 years and a weighted average discount rate of 4.75%.

Minimum lease payments for the Company’s operating lease liabilities were as follows for the twelve month periods ended June 30:

The Company has leases with terms of less than one year for certain provincial sales offices that are not material.

NOTE 10 - INCOME TAXES

Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

Liabilities are established for uncertain tax positions expected to be taken in income tax returns when such positions are judged to meet the “more-likely-than-not” threshold based on the technical merits of the positions. Estimated interest and penalties related to uncertain tax positions are included as a component of other expenses. Through December 31, 2019, the Company has not identified any uncertain tax positions that it has taken. U.S. income tax returns for the years ended December 31, 2016 through December 31, 2019 and the Chinese income tax return for the year ended December 31, 2019 are open for possible examination.

Under the current tax law in the PRC, the Company is and will be subject to the enterprise income tax rate of 25%.

There was no provision for income taxes for the three and six months ended June 30, 2020 and 2019 respectively due to continued net losses of the Company.

As of June 30, 2020, the Company had net operating loss carryforwards for PRC tax purposes of approximately $51.7 million which are available to offset any future taxable income through 2025. Approximately $21.6 million of these carryforwards will expire in December 2020. The Company also has net operating losses for United States federal income tax purposes of approximately $6.4 million of which $5.1 million are available to offset future taxable income, if any, through 2039, and $1.3 million are available for carryforward indefinitely subject to a limitation of 80% of taxable income for each tax year.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

Recent U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those differences become deductible or tax loss carry forwards are utilized.  Management considers projected future taxable income and tax planning strategies in making this assessment.  Based upon an assessment of the level of historical taxable income and projections for future taxable income over the periods on which the deferred tax assets are deductible or can be utilized, management believes it is not likely for the Company to realize all benefits of the deferred tax assets as of June 30, 2020 and December 31, 2019.  Therefore, the Company provided for a valuation allowance against its deferred tax assets of $30,455,483 and $30,759,656 as of June 30, 2020 and December 31, 2019, respectively.

The Company also incurred various other taxes, comprised primarily of business taxes, value-added taxes, urban construction taxes, education surcharges and others. Any unpaid amounts are reflected on the balance sheets as accrued taxes payable.

NOTE 11 – FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, a hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; and Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company uses fair value to measure the value of the banker’s acceptance notes it holds at June 30, 2020 and December 31, 2019. The banker’s acceptance notes are recorded at cost which approximates fair value.  The Company held the following assets and liabilities recorded at fair value:

NOTE 12 - STOCKHOLDERS’ EQUITY

The Company is authorized to issue 95,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value. The preferred stock may be issued in series with such designations, preferences, stated values, rights, qualifications or limitations as determined solely by the Company’s Board.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

NOTE 13 – REVENUE

The following table summarizes the Company’s revenues disaggregated by revenue source and geography based on the Company’s PRC based business locations:

There were no sales of medical test kits within the PRC. Medical test kits under this note is COVID-19 testers as referred to under Item 2 of this report.

NOTE 14 – RISKS & UNCERTAINTIES

Current vulnerability due to certain concentrations

For the six months ended June 30, 2020, one customer accounted for 30.7% of sales and two customers respectively accounted for 49.8% and 10.7% of accounts receivable. Two suppliers respectively accounted for 39.0% and 18.6% of raw material purchases, and three different products respectively accounted for 30.8%, 21.4% and 13.9% of revenue.

For the six months ended June 30, 2019, no customer accounted for more than 10% of sales and two customers respectively accounted for 49.7% and 10.7% of accounts receivable. Two suppliers respectively accounted for 27.7% and 24.7% of the Company’s raw material purchases, and three different products respectively accounted for 33.9%, 21.0% and 16.1% of revenue.

Nature of Operations

Impact from the New Coronavirus Global Pandemic (“COVID-19”) - The current outbreak of COVID-19 had a material and adverse effect on the Company’s business operations. These included, but are not limited to, disruptions or restrictions on its ability to travel or to distribute its products, as well as temporary closures of its facilities or the facilities of the suppliers or customers. Company reopened its facility and ramped up its operations in the first quarter 2020, there is a risk of a resurgence of the outbreak such as certain cities witnesses including Hong Kong. Any disruption or delay of the Company’s suppliers or customers would likely impact its sales and operating results. In addition, COVID-19 has resulted in a widespread health crisis that could adversely affect the economies and financial markets of China and many other countries, resulting in an economic downturn that could significantly impact the Company operating results.

Economic environment - Substantially all of the Company’s operations are conducted in the PRC, and therefore the Company is subject to special considerations and significant risks not typically associated with companies operating in the United States of America. These risks include, among others, the political, economic and legal environments and fluctuations in the foreign currency exchange rate. The Company’s results from operations may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The unfavorable changes in global macroeconomic factors may also adversely affect the Company’s operations.

In addition, all of the Company’s revenue is denominated in the PRC’s currency of Renminbi (RMB), which must be converted into other currencies before remittance out of the PRC. Both the conversion of RMB into foreign currencies and the remittance of foreign currencies abroad require approval of the PRC government.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 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, CFDA) based upon demonstrated safety and efficacy.

China’s consistency evaluation of generic drugs had continued to proceed in 2019. The supporting policies from central and provincial governments have been constantly issued. We have always taken the tasks of facilitating 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 progresses in terms of the consistency evaluation.

We have to take a more cautious and flexible attitude towards the initiating and progressing any project for an existing product’s consistency evaluation and to cope with the changing macro environment of drug sales in China. On one hand, since initiated in 2018, two rounds of “4 + 7” (refers to 11 selected pilot cities, including 4 municipalities and 7 other cities) Group Purchasing Organization (“GPO”) activities had been carried out by the end of 2019, which significantly reduced the price of the drugs that won the bids. On the other hand, the consistency evaluation has been adopted as one of the qualification standards for participating in the GPO activities. As a result, we need balance at least the two factors above before making decisions for any project.

In addition, we continue to explore in 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. It focuses on people’s daily life, aging and disease, pays attention to all kinds of risk factors and misunderstandings affecting health, and calls for self-health management, and advocates the comprehensive care of 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, healthy and nutrition-rich food supplement at the end of 2018, and wash-free sanitizer and mask in early 2020 to address the market needs caused by COVID-19 in China.

We will continue to optimize our product structure and actively respond to the current health needs of human beings.

Market Trends

As the medical reform deepens, the GPO program has been expanded from pilot cities to the whole country, which pressed hospitals to control drug prices to reduce overall costs. The pressure of price reduction has been further transmitted to pharmaceutical manufacturers. We believe that the price control is still one of the key themes in the pharmaceutical industry in the future; and pharmaceutical manufacturing companies’ revenues are under obvious pressure.

Novel coronavirus pneumonia (COVID-19) refers to the pneumonia caused by the 2019 novel coronavirus infection. According to the data released by the World Health Organization (WHO) on August 2, 2020, the cumulative number of confirmed cases of COVID-19 reached 17,660,523 in the world. At an emergency meeting of WHO on July 31, 2020, Director-General Tandese said that COVID-19 was a once-in-a-century human health crisis and that people will be affected by it for an entire decade.

We believe that several new development opportunities are emerged in China’s healthcare sector in connection with this outbreak due to the following reasons: there is a gap between prevention and treatment of diseases; the level of treatment skills and conditions of primary medical institutions needs to be improved; large hospitals are overcrowded; and there are too many restrictions on the internet healthcare service. The impact of the pandemic will bring more governmental and social attention to China’s health care industry, which we believe will promote its overall development, and trigger potential adjustments in products and service, and sales channel in the health care industry.

As a generic drug company we are presented with a huge domestic market. We believe that through further upgrades and consistency evaluations, we will be able to meet the European and American production standards, which enables us to export our products to overseas markets. 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 GPO’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. In addition, 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 are a large number of unmet demands in comprehensive healthcare and Internet healthcare sectors.

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, and competition in the market in order to optimize our development strategy.

Results of operations for the three months ended June 30, 2020

Revenue

Revenue increased by 46.8% to $3.8 million for the three months ended June 30, 2020, as compared to $2.6 million for the three months ended June 30, 2019. This increase was mainly due to a foreign trade of COVID-19 testers we completed in the second quarter of 2020. Because of the market demand for COVID-19 related products, we received an export order for diagnostic test, which we purchased from a third party. This one-time business contributed approximately $1.7 million to our revenue for the three months ended June 30, 2020. This is a milestone of our continuous efforts to explore various niche markets, products and regions based on our experiences and abilities.

Set forth below are our revenues by product category in millions (USD) for the three months ended June 30, 2020 and 2019, excluding the one-time revenue from the trading of COVID-19 testers during such period:

The most significant revenue decrease in terms of dollar amount was in our “Anti-Viral/ Infection & Respiratory” product category, which generated $0.95 million and $1.46 million of sales in the three months ended June 30, 2020 and 2019, respectively. This decrease was mainly due to the decrease in sales of Cefaclor Dispersible Tablets.

“Others” product category generated $0.48 million in sales revenue in the three months ended June 30, 2020 compared to $0.40 million for the same period a year ago, which represented an increase of $0.08 million. This decrease was mainly due to the sales of medical protection products.

Sales in the “CNS Cerebral & Cardio Vascular” product category decreased to $0.57 million in the three months ended June 30, 2020, as compared to $0.62 million for the same period in 2019, which represented a decrease of $0.05 million. This decrease was mainly due to the decrease in sales of Gastrodin.

Our “Digestive Diseases” product category sales also decreased by $0.02 million to $0.10 million in the three months ended June 30, 2020 from $0.12 million for the same period in 2019, which was mainly due to the decrease in sales of Omeprazole.

For the three months ended June 30, 2020, revenue breakdown by product category showed a few changes to that of the same period in 2019. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 45% and 56% of total sales in the three months ended June 30, 2020 and 2019, respectively. The “CNS Cerebral & Cardio Vascular” product category represented 27% and 24% of total revenue in the three months ended June 30, 2020 and 2019, respectively. The “Digestive Diseases” product category represented both 5% total revenue in the three months ended June 30, 2020 and 2019, respectively. The “Other” product category represented 23% and 15% of revenues in the three months ended June 30, 2020 and 2019, respectively. 

Cost of Revenue

For the three months ended June 30, 2020, our cost of revenue was $2.6 million, or 70% of total revenue, comparing to $2.4 million, or 94% of total revenue, for the same period in 2019. The decrease in cost of revenue was mainly due to a foreign trade of COVID-19 testers we completed in the second quarter of 2020.

Gross Profit and Gross Margin

Gross profit for the three months ended June 30, 2020 was $1.1 million, as compared to $0.2 million during the same period in 2019. Our gross profit margin in the three months ended June 30, 2020 was 30.5% as compared to 6.4% during the same period in 2019. The increase in our gross profit margin was mainly due to a foreign trade of COVID-19 testers we completed in the second quarter of 2020.

Selling Expenses

Our selling expenses for the three months ended June 30, 2020 and 2019 were $0.7 million and $0.5 million, respectively. Selling expenses accounted for 19.3% of the total revenue in the three months ended June 30, 2020, as compared to 19.7% during the same period in 2019. Because of adjustments in our sales practices, and reform of healthcare policies, we reduced number of personnel and expenses to efficiently support our sales and the collection of accounts receivable.

General and Administrative Expenses

Our general and administrative expenses were both $0.3 million for the three months ended June 30, 2020 and 2019, respectively. General and administrative expenses accounted for 8.6% and 13.0% of our total revenues in the three months ended June 30, 2020 and 2019, respectively.

Research and Development Expenses

Our research and development expenses for the three months ended June 30, 2020 were $0.03 million, as compared to $0.07 million in the same period in 2019. Research and development expenses accounted for 0.8% and 2.6% of our total revenues in the three months ended June 30, 2020 and 2019, respectively. These expenditures were mainly for the consistency evaluations of our existing products.

Bad Debt (Benefit) Expenses

Our bad debt benefit for the three months ended June 30, 2020 was $5,318, as compared to bad debt expense of $10,092 for the same period in 2019. This was mainly because that we have collected more longer aged accounts receivable in the three months ended June 30, 2020 as compared to the same period last year.

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 $0.13 million and $0.15 million as of June 30, 2020 and December 31, 2019, respectively.

The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of June 30, 2020 and December 31, 2019:

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 no allowance of accounts receivable recognized 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 $17.3 million as of June 30, 2020 and $17.6 million as of December 31, 2019. The changes in the allowances for doubtful accounts during the three months ended June 30, 2020 and 2019 were as follows:

Income (Loss) from Operations

Our operating income for the three months ended June 30, 2020 was $0.1 million, compared to an operating loss of $0.8 million during the same period in 2019.

Net Interest Expense

Net interest expense for the three months ended June 30, 2020 and 2019 was $0.06 million and $0.09 million, respectively.

Net Income (Loss)

Net income for the three months ended June 30, 2020 was $0.01 million, as compared to net loss of $0.84 million for the same period a year ago. The decrease in net loss was mainly the result of a foreign trade of COVID-19 testers we completed in the second quarter of 2020.

For the three months ended June 30, 2020 earnings per basic and diluted common share was $0.00, as compared to loss per basic and diluted common share was $0.02 for the three months ended June 30, 2019.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 43,579,557 for both the three months ended June 30, 2020 and 2019.

Results of operations for the six months ended June 30, 2020

Revenue

Revenue was both $5.5 million for the six months ended June 30, 2020 and 2019, respectively.  

Set forth below are our revenues by product category in millions (USD) for the six months ended June 30, 2020 and 2019, respectively, excluding the one-time revenue from the trading of COVID-19 testers during such period:

The most significant revenue decrease in terms of dollar amount was in our “Anti-Viral/ Infection & Respiratory”, which generated $2.14 million in sales revenue in the six months ended June 30, 2020 compared to $3.32 million in the same period a year ago, a decrease of $1.18 million. This decrease was mainly due to sales decrease of Cefaclor.

Sales of our “Other” product category, which generated $0.70 million in sales revenue in the six months ended June 30, 2020 compared to $0.90 million in the same period a year ago, which represented a decrease of $0.20 million, mainly due to the decrease in sales of Vitamin B6 for Injection.

“CNS Cerebral & Cardio Vascular” category, which generated $0.82 million in sales revenue in the six months ended June 30, 2020 compared to $1.07 million in the same period a year ago, a decrease of $0.25 million. This decrease was mainly due to sales decrease of Ozagrel Sodium for Injection.

Sales of our Digestive Diseases category also decreased by $0.06 million to $0.17 million in the six months ended June 30, 2020 from $0.23 million in the same period in 2019, mainly due to the decrease in sales of Omeprazole.

For the six months ended June 30, 2020, revenue breakdown by product category remained similar to that of the same period in 2019. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 56% and 60% of total sales in the six months ended June 30, 2020 and 2019, respectively. The “CNS Cerebral & Cardio Vascular” category represented 22% and 20% of total revenue in the six months ended June 30, 2020 and 2019, respectively. The “Digestive Diseases” category represented both 4% of total revenue in the six months ended June 30, 2020 and 2019. And the “Other” category represented 18% and 16% of revenues in the six months ended June 30, 2020 and 2019, respectively.

Cost of Revenue

For the six months ended June 30, 2020, our cost of revenue was $4.2 million, or 76% of total revenue, comparing to $5.5 million, or 85% of total revenue, in the same period in 2019. The decrease in cost of revenue was mainly due to a foreign trade of COVID-19 testers we completed in the second quarter of 2020.

Gross Profit and Gross Margin

Gross profit for the six months ended June 30, 2020 was $1.3 million, compared to $0.8 million in the same period in 2019. Our gross profit margin in the six months ended June 30, 2020 was 24.3% compared to 14.9% in the same period in 2019. The increase in our gross profit margin was mainly due to a foreign trade of COVID-19 testers we completed in the second quarter of 2020.

Selling Expenses

Our selling expenses for the six months ended June 30, 2020 and 2019 were $1.1 million and $1.0 million, respectively. Selling expenses accounted for 19.0% of the total revenue in the six months ended June 30, 2020 compared to 17.9% in the same period in 2019. 

General and Administrative Expenses

Our general and administrative expenses for the six months ended June 30, 2020 were $0.71 million, which represented a decrease of $0.05 million compared to $0.76 million in the same period in 2019. General and administrative expenses accounted for 12.8% and 13.8% of our total revenues in the six months ended June 30, 2020 and 2019, respectively.

Research and Development Expenses

Our research and development expenses for the six months ended June 30, 2020 and 2018 were $0.07 million and $0.14 million, respectively, representing a decrease of $0.06 million compared to the same period of last year.

Bad Debt Expenses

Our bad debt expenses were both $0.02 million for the six months ended June 30, 2020 and 2019.

The changes in the allowances for doubtful accounts during the six months ended June 30, 2020 and 2019 were as follows:

Loss from Operations

Our operating loss for the six months ended June 30, 2020 was $0.5 million, compared to $1.1 million in the same period in 2019.

Net Interest Expense

Net interest expense for the six months ended June 30, 2020 was $0.12 million, compared to $0.17 million for the same period in 2019.

Net Loss

Net loss for the six months ended June 30, 2020 was $0.6 million, as compared to net loss of $1.3 million for the six months ended June 30, 2019. The decrease of net loss was mainly due to a foreign trade of COVID-19 testers we completed in the second quarter of 2020. 

For the six months ended June 30, 2020, loss per basic and diluted common share was $0.01, compared to loss per basic and diluted common share of $0.03 for the six months ended June 30, 2019.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 43,579,557 for each of the six months ended June 30, 2020 and 2019.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations and bank lines of credit. Our cash and cash equivalents were $1.8 million, representing 7.8% of our total assets, as of June 30, 2020, as compared to $1.1 million, representing 4.8% of our total assets as of December 31, 2019. All of the $1.8 million of cash and cash equivalents as of June 30, 2020 is considered to be reinvested indefinitely in the Company’s Chinese subsidiary, Helpson and is not expected to be available for payment of dividends or for other payments to its parent company or to its shareholders. In April 2020, the Company obtained a line of credit from Postal Savings Bank of China for an aggregate amount of RMB 10,000,000 (approximately $1.4 million), of which RMB 5,000,000 (approximately $0.7 million) have been advanced at June 30, 2020. In July 2020 an additional RMB 3,000,000 (approximately $0.4 million) has been advanced under this line of credit. The loan bears interest at a rate of 4.25% per annum. Advances on the line of credit are due two years from the date of the advance.  The Company has an additional RMB 2,000,000 (approximately $0.3 million) available under the line, subject to a risk review and approval by the third party guarantee company. On June 30, 2020 the Company obtained a line of credit with Bank of Communications for an aggregate amount of RMB 8,500,000 (approximately $1.2 million), all of which has been advanced. The loan bears interest at the rate of 4.05% per annum. We entered into an eight-year construction loan facility on September 21, 2013. The total construction loan facility amount was RMB80 million (approximately $11.7 million), which had been fully utilized through May 7, 2014. As of June 30, 2020, the construction loan installments to be repaid within the next 12 months are about $2.2 million. On July 10, 2020, we repaid such principal and accumulatively repaid the principal of RMB 65 million (approximately $9.2 million) of the construction loans, per the payback schedule. The total balance of the construction loan facility is RMB 29 million ($4.1 million) as of June 30, 2020, which includes $2.1 million due within 12 months, and $2.0 million due beyond 12 months. Cash flow generated from operating activities was used to fund our daily operating expenses as well as the repayment of our loan facility.

Based on our current operating plan, management believes that cash provided by operations, in addition to the newly obtained line of credit in April and June 2020 may not be sufficient to meet our working capital needs and our anticipated capital expenditures for the next twelve months, raising substantial doubt about our ability to continue as a going concern. We may seek debt or equity financing as necessary when we believe the market conditions are the most advantageous to us and/or reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives.  Although our Chairperson and Chief Executive Officer had advanced funds for working capital during 2019 and the first half of 2020, there can be no assurances that this will be the case in the future. 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 $0.2 million in the six months ended June 30, 2020, as compared to net cash provided by operating activities was $0.2 million for the same period in 2019.

Our net accounts receivable was both $0.6 million as of June 30, 2020 and December 31, 2019.

Total inventory was $3.9 million, as of June 30, 2020, and $3.6 million as of December 31, 2019.

Investing Activities

During the six months ended June 30, 2020, net cash used in investing activities was $0.84 million as compared to $0.07 million for the six months ended June 30, 2019. The increase was mainly due to the purchase of mask production lines.

Financing Activities

Cash flow generated by financing activities was $1.9 million in the six months ended June 30, 2020, as compared to cash flow used in financing activities was $0.4 million in the six months ended June 30, 2019. The financing activities that occurred in the six months ended June 30, 2020 were primarily new credit lines we obtained from banks as discussed above and in Note 8.

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 June 30, 2020 and December 31, 2019, Helpson’s net assets totaled $6,570,000 and $7,189,000, 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 $8,145,000 and $8,145,000 as of June 30, 2020 and December 31, 2019, respectively. The amount that Helpson must set aside for the statutory surplus fund accounts for 124.0% and 29.6% of its total net assets.  There were no allocations to the statutory surplus reserve accounts during the six months ended June 30, 2020.

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 June 30, 2020, 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and interim Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to management, including our Chief Executive Officer and interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2020 to satisfy the objectives for which they are intended. This was due to the material weakness in our internal control over financial reporting, with respect to our lack of accounting financial reporting personnel who were knowledgeable in U.S. GAAP, as disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 30, 2020. Notwithstanding the aforementioned material weakness, management has concluded that our consolidated financial statements included in this report are fairly stated in all material respects in accordance with U.S. GAAP for each period presented herein.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 6. Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

EXHIBIT INDEX

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