CHINA PHARMA HOLDINGS, INC. - Quarter Report: 2021 September (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 September 30, 2021

☐ 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 November 10, 2021, there were 47,339,557 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

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

CHINA PHARMA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE 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

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

CHINA PHARMA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)

NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations – China Pharma Holdings, Inc., a Nevada corporation (the “Company”), 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 Wholly Foreign Owned Enterprise (“WFOE”) status on June 21, 2005.

Helpson is 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 PRC. All of its operations are conducted in the PRC, where its manufacturing facilities are located. Helpson manufactures pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions. The majority of its 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, or CFDA) based upon demonstrated safety and efficacy.

Liquidity and Going Concern

As of September 30, 2021, the Company had cash and cash equivalents of $0.5 million and an accumulated deficit of $31.3 million. The Company’s Chairperson, Chief Executive Officer and Interim Chief Financial Officer has advanced an aggregate of $1,702,705 at September 30, 2021 to provide working capital and enable the Company to make the required payments related to its construction loan facility. The Company anticipates operating losses 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 costs. 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. While the current plans 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. The accompanying consolidated financial statements 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

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2021 (“2020 Annual Report”).

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.

Loss Per Share - Basic loss per share is calculated by dividing loss available to common stockholders by the weighted-average number of shares of common stock outstanding, excluding unvested stock. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential common shares, including unvested stock, had been issued and if the additional common shares were dilutive.

The potentially dilutive common shares related to the option to purchase 65,000 shares of common stock are excluded from the computation of diluted net loss per share for all periods presented because the effect is anti-dilutive due to net losses of the Company.

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 smaller reporting company 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 Accounting Standards Codification (“ASC”) 740, Income Taxes. It also clarifies certain aspects of the existing guidance to promote more consistent application, among other things. The guidance was implemented January 1, 2021 and there was no impact on the condensed consolidated financial statements.

From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASC 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

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (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. Depreciation expense was $966,956 and $664,400 for the three months ended September 30, 2021 and 2020, respectively and $2,348,606 and $1,951,986 for the nine months ended September 30, 2021 and 2020, respectively.

NOTE 4 - INTANGIBLE ASSETS

Intangible assets represent the cost of medical formulas approved for production by the NMPA. The Company did not obtain NMPA production approval for any new medical formulas during the nine months ended September 30, 2021 and 2020 and no costs were reclassified from advances to intangible assets during the nine months ended September 30, 2021 and 2020, 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 $9,501 and $8,893 for the three months ended September 30, 2021 and 2020, respectively and $28,498 and $26,377 for the nine months ended September 30, 2021 and 2020, 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

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (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 nine months ended September 30, 2021 and 2020.

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

NOTE 5 – OTHER PAYABLES

Other Payables consisted of the following:

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 September 30, 2021 and December 31, 2020 which is 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 September 30, 2021 and 2020 was $3,386 and $3,386, respectively and $10,159 and $10,159 for the nine months ended September 30, 2021, respectively. Compensation and interest payable to the board member is included in Other payables in the accompanying condensed consolidated balance sheet totaling $404,646 and $382,486 as of September 30, 2021 and December 31, 2020, respectively.

The Company received advances totaling $1,147,192 and repaid $251,334 of the advances during the nine months ended September 30, 2021 from its Chairperson, Chief Executive Officer and Interim Chief Financial Officer. Total amounts owed were $1,702,705 and $779,861 and are recorded as Other payables – related parties on the accompanying condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, respectively. On July 8, 2019 the Company entered into a loan agreement in exchange for cash of RMB 4,770,000 ($738,379) 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 and further extended to July 9, 2022 on identical terms. Total interest expense related to the loan for the three months ended September 30, 2021 and 2020 was $7,526 and $7,282, respectively and $22,576 and $21,846 for the nine months ended September 30, 2021 and 2020, respectively. Compensation payable to the Chairperson, Chief Executive Officer and Interim Chief Financial Officer is included in Other payables in the accompanying condensed consolidated balance sheet totaling $645,328 and $1,815,990 as of September 30, 2021 and December 31, 2020, respectively. As discussed more fully in Note 12, an aggregate of $1,179,200 of compensation was converted into a total of 1,760,000 shares of common stock at the market price of $0.67 per share from the Company’s 2010 Long-Term Incentive Plan, as amended.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (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 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 September 30, 2021 and December 31, 2020, the Company had no outstanding banker’s acceptance notes payable.

NOTE 8 – CONSTRUCTION LOAN FACILITY AND LINES OF CREDIT

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 each of the July 10 anniversary dates since inception.  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. During the nine months ended September 30, 2021, the Company made the remaining principal payments due under the loan in the amount of $2,317,879 (RMB 15,000,000). On September 18, 2021 the Company entered into a new line of credit with the same bank as discussed below.

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) was advanced in April 2020, and RMB 3,000,000 (approximately $0.4 million) was advanced in July 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 2,000,000 (approximately $0.3 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 months ended September 30, 2021 and 2020 was $10,907 and $10,420, respectively. Total interest expense under this facility for the Nine months ended September 30, 2021 and 2020 was $34,424 and $15,410, respectively. The Company repaid RMB 1,100,000 (approximately $0.17 million) during the nine months ended September 30, 2021 as per the repayment schedule.

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. On June 21, 2021 the Company paid the balance in full. On June 25, 2021 the Company entered into a new loan bearing an interest rate of 4.17%. 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 expense for the three months ended September 30, 2021 and 2020 was $13,390 and $11,372, respectively. Total interest expense for the nine months ended September 30, 2021 and 2020 was $40,281 and $11,372, respectively.

The Company obtained a line of credit of RMB 3,200,000 (approximately $0.5 million) from China CITIC Bank in September 2020 and obtained an advance of RMB 2,343,340 (approximately $0.3 million), and the remaining of RMB 856,660 (approximately $0.1 million) in October 2020 under this line. The loan bears interest at the rate of 4.50% per annum. In September, 2021 the Company repaid the line of credit in full, Also in September, 2021 the Company entered into a new line a credit in the amount of RMB 3,200,000 ((approximately $0.8 million) on the same terms. The line of credit is due on September 2, 2022. 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 months ended September, 2021 and 2020 was $5,440 and $377, respectively. Total interest for the nine months ended September, 2021 and 2020 was $16,689 and $377, respectively.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)

On July 12, 2021, the Company obtained a short-term loan of RMB 3 million (approximately US$460,000) from Haikou HaiHongXin microfinance Co., Ltd., with a monthly interest rate of 1.5%. The company paid off the loan in September 2021. The total interest paid on this loan is RMB103550 (approximately USD 16,000) for the three and nine months ended September 30, 2021. This loan is guaranteed by Haikou Financing Guarantee Company.

On September 18, 2021 the Company obtained a line of credit for RMB 10,000,000 (approximately $1.54 million) with Bank of China. The loan bears interest at the rate of 3.85% per annum. The line of credit is due September 18, 2022. The loan is collateralized by the Company’s new production facility and the included production line equipment and machinery. In addition, the Company’s Chief Executive Officer and Chair of the Board personally guaranteed the new line of credit. Total interest for the three months ended September, 2021 and 2020 was $5,697 and $0, respectively. Total interest for the nine months ended September, 2021 and 2020 was $5,697 and $0, respectively.

Principal payments required for the remaining terms of the loan facility and lines of credit as of September 30, 2021 are as follows:

Fair Value of Construction Loan Facility – 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 September 30, 2021 and December 31, 2020 approximated its 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 September 30, 2021 and 2020, operating lease cost was $22,195 and $23,127, respectively and cash paid for amounts included in the measurement of lease liabilities for operating cash flows from operating leases was $23,327 and $24,581, respectively. For the nine months ended September 30, 2021 and 2020, operating lease cost was $70,955 and $69,382, respectively and cash paid for amounts included in the measurement of lease liabilities for operating cash flows from operating leases was $75,154 and $73,745, respectively. As of September 30, 2021 and December 31, 2020, the Company reported operating lease right of use assets of $146,759 and $70,733, respectively and operating use liabilities of $147,618 and $73,690, respectively. As of September 30, 2021, its operating leases had a weighted average remaining lease term of 1.73 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 September 30:

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

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)

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, 2020, the Company has not identified any uncertain tax positions that it has taken. U.S. income tax returns for the years ended December 31, 2017 through December 31, 2020 and the Chinese income tax return for the year ended December 31, 2020 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 nine months ended September 30, 2021 and 2020, respectively due to continued net losses of the Company.

As of September 30, 2021, the Company had net operating loss carryforwards for PRC tax purposes of approximately $40.4 million which are available to offset any future taxable income through 2026. Approximately $20.1 million of these carryforwards will expire in December 2021. The Company also has net operating losses for United States federal income tax purposes of approximately $7.0 million of which $5.1 million is available to offset future taxable income, if any, through 2039, and $1.9 million are available for carryforward indefinitely subject to a limitation of 80% of taxable income for each tax year.

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 September 30, 2021 and December 31, 2020.  Therefore, the Company provided for a valuation allowance against its deferred tax assets of $28,412,653 and $27,666,557 as of September 30, 2021 and December 31, 2020, 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.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)

The Company uses fair value to measure the value of the banker’s acceptance notes it holds at September 30, 2021 and December 31, 2020. 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.

According to relevant PRC laws, companies registered in the PRC, including the Company’s PRC subsidiary, Helpson, are required to allocate at least 10% of their after tax income, as determined under the accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach 50% of the company’s 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. The amount designated for general and statutory capital reserves is $8,145,000 at September 30, 2021 and December 31, 2020.

2010 Incentive Plan

On November 12, 2010, the Company’s Board adopted the Company’s 2010 Incentive Plan (the “Plan”), which was then approved by stockholders on December 22, 2010. On October 17, 2019, the Board of Directors approved the First Amendment to the 2010 Incentive Plan (the “Amendment”), pursuant to which the term of the 2010 Incentive Plan was extended to December 31, 2029. The Amendment was adopted by the shareholders on December 19, 2019. The Plan gave the Company the ability to grant stock options, restricted stock, stock appreciation rights and performance units to its employees, directors and consultants, or those who will become employees, directors and consultants of the Company and/or its subsidiaries. The Plan currently allows for equity awards of up to 4,000,000 shares of common stock. Through September 30, 2021, there were 3,935,000 shares of stock and stock options granted and outstanding under the Plan.  A total of 65,000 options were outstanding as of September 30, 2021 under the Plan. As such, there are no additional shares available for issuance under the Plan.

On September 9, 2021 the Company issued an aggregate of 1,760,000 fully vested shares of common stock at the price of $0.67, representing the closing market price on that date to its Chairperson, Chief Executive Officer and Interim Chief Financial Officer under the Plan, as amended, to partially offset certain unpaid cash compensation totaling $1,179,200.

Also on September 9, 2021 the Company issued an option to purchase 65,000 shares of common stock at an exercise price at $1.47 per share, under the Plan. The Option vests immediately and expires on September 9, 2024. The fair value of the options granted of $15,243 was calculated using the Black-Scholes option valuation model using the closing market price of $0.67 per share, volatility of 118.4%, risk free interest rate of 0.75% and an expected life of 1.5 years. The value was charged to General and administrative expenses on the accompanying Statement of Operations for the three and nine months ended September 30, 2021.

As of September 30, 2021, there was no remaining unrecognized compensation expense related to stock options or restricted stock grants.

CHINA PHARMA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (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.

NOTE 14 – RISKS & UNCERTAINTIES

Current vulnerability due to certain concentrations

For the nine months ended September 30, 2021, no customer accounted for more than 10% of sales and three customers accounted for 52.2%, 11.2% and 10.2% of accounts receivable. Three suppliers accounted for 27.3%, 16.1%and 13.0% of raw material purchases, and three different products accounted for 29.2%, 19.1% and 14.7% of revenue.

For the nine months ended September 30, 2020, one customer accounted for 21.6% of sales and two customers respectively accounted for 50.2% and 10.8% of accounts receivable. Two suppliers respectively accounted for 19.5% and 14.8% of raw material purchases, and three different products respectively accounted for 29.5%, 19.1% and 16.9% of revenue.

Nature of Operations

Impact from the New Coronavirus Global Pandemic (“COVID-19”) - The current outbreak of COVID-19 since the first quarter 2020 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. Through strict prevention and quarantine measures, China has effectively controlled the COVID-19 outbreak and returned to normal production and social life in an orderly manner. However, due to the deterioration of this pandemic in other countries, such as India, we still need to be on high alert on any potential risks. Any disruption or delay of the Company’s suppliers or customers in the future would likely impact its sales and operating results. In addition, COVID-19 has resulted in a widespread health crisis that could continue to adversely affect the economies and financial markets of China and many other countries, resulting in an economic downturn that could significantly impact our 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, or CFDA) based upon demonstrated safety and efficacy.

China’s consistency evaluation of generic drugs had continued to proceed in the third quarter of 2021. The supporting policies from central and provincial governments have been constantly issued, including polices regarding consistency evaluation for injectable products. We have always taken the task 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 progress in terms of the consistency evaluation. We have a product that passed biological equivalents experiments of consistency evaluation in March 2021. We plan to submit application documents to NMPA in the near future.

We have taken a more cautious and flexible attitude towards 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 “4 + 7” (refers to 11 selected pilot cities, including 4 municipalities and 7 other cities) trial Centralized Procurement (“CP”) activities initiated in 2018, five rounds of CP activities had been carried out by June 2021, 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 CP activities. As a result, we need to balance at least the two factors above before making decisions for any products.

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 by 2020, and RMB 16 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 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, Xeronine-rich antioxidant food supplement at the end of 2018, wash-free sanitizers and masks, in 2020, to address the market needs caused by COVID-19 in China. The impact of COVID-19 has continued. 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 consistency evaluations, we will be able to meet the European and American production standards, which will enable 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 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 our production practices to meet the European and United States standards by separating drug approval and production qualifications, thereby changing the existing model of bundling drug approval numbers to pharmaceutical manufacturers in China, but also serves as a supplement to the ongoing consistency evaluations policy.

In general, demand for pharmaceutical products is still experiencing steady growth in China. We believe the ongoing generic drug consistency evaluations and reform of China’s drug production registration and review policies will have major effects on the future development of our industry and may change its business patterns. We will continue to actively adapt to the national policy guidance and further evaluate market conditions for our existing products, and competition in the market in order to optimize our development strategy.

Results of operations for the three months ended September 30, 2021

Revenue

Revenue decreased by 17.6% to $2.0 million for the three months ended September 30, 2021, as compared to $2.4 million for the three months ended June 30, 2020. This decrease was mainly due to the expansion of the scope of national centralized drug purchases and the related price reduction.

Set forth below are our revenues by product category in millions (USD) for the three months ended September 30, 2021 and 2020, respectively:

The most significant revenue decrease in terms of dollar amount was in our “Anti-Viral/ Infection & Respiratory” product category, which generated $0.92 million in the three months ended September 30, 2021, which represented a decrease of $0.26 million as compared to $1.18 million in the three months ended September 30, 2020. This decrease was mainly due to the decrease in sales of Cefaclor Dispersible Tablets.

“CNS Cerebral & Cardio Vascular” product category generated $0.56 million in sales revenue in the three months ended September 30, 2021 compared to $0.63 million for the same period a year ago, which represented a decrease of $0.07 million. This decrease was mainly due to the decrease in sales of Alginic Sodium Diester Injection.

“Others” product category generated $0.39 million in sales revenue in the three months ended September 30, 2021 compared to $0.46 million for the same period a year ago, which represented a decrease of $0.07 million. This decrease was mainly due to the decrease in sales of Vitamin B6 for Injection.

Our “Digestive Diseases” product category generated $0.10 million and $0.13 million in the three months ended September 30, 2021 and 2020, respectively.

For the three months ended September 30, 2021, revenue breakdown by product category showed a few changes to that of the same period in 2020. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 47% and 49% of total sales in the three months ended September 30, 2021 and 2020, respectively. The “CNS Cerebral & Cardio Vascular” product category represented 28% and 26% of total revenue in the three months ended September 30, 2021 and 2020, respectively. The “Digestive Diseases” product category represented both 5% of total revenue in the three months ended September 30, 2021 and 2020, respectively. The “Other” product category represented 20% and 19% of revenues in the three months ended September 30, 2021 and 2020, respectively. 

Cost of Revenue

For the three months ended September 30, 2021, our cost of revenue was $2.3 million, or 115% of total revenue, comparing to $2.4 million, or 98% of total revenue, for the same period in 2020. The increase in the proportion of costs to revenue is mainly due to the decline in revenue.

Gross Profit and Gross Margin

Gross profit for the three months ended September 30, 2021 was $(0.30) million, as compared to $0.05 million during the same period in 2020. Our gross profit margin in the three months ended September 30, 2021 was -15% as compared to 2% during the same period in 2020. The decrease in our gross profit margin was a result of the decline in revenue for this quarter.

Selling Expenses

Our selling expenses for the three months ended September 30, 2021 and 2020 were $0.13 million and $0.65 million, respectively. Selling expenses accounted for 6.8% of the total revenue in the three months ended September 30, 2021, as compared to 27.2% during the same period in 2020. Because of adjustments in our sales practices and Chinese national centralized drug procurement, we reduced selling expenses to efficiently support our sales and the collection of accounts receivable. Especially in the context of the increasing impact of centralized drug procurement, like other players in the industry, we have reduced the promotion expenses.

General and Administrative Expenses

Our general and administrative expenses were $0.30 million and $0.29 million for the three months ended September 30, 2021 and 2020, respectively. General and administrative expenses accounted for 15.3% and 12.1% of our total revenues in the three months ended September 30, 2021 and 2020, respectively.

Research and Development Expenses

Our research and development expenses for the three months ended September 30, 2021 were $0.02 million, as compared to $0.04 million in the same period in 2020. Research and development expenses accounted for 1.1% and 1.6% of our total revenues in the three months ended September 30, 2021 and 2020, respectively. These expenditures were mainly used for the consistency evaluations of our existing products.

Bad Debt Expenses

Our bad debt expense for the three months ended September 30, 2021 was $8,372, as compared to $17,386 for the same period in 2020.

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 $0.06 million as of September 30, 2021 and December 31, 2020, respectively.

The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of September 30, 2021 and December 31, 2020:

Since the fourth quarter of 2018, our bad debt allowance estimate has been updated to a policy which requires no allowance of accounts receivable recognized that is within 180 days old, 10% of accounts receivable that is between 180 days and 365 days old, 70% of accounts receivable that is between 365 days and 720 days old, and 100% of accounts receivable that is greater than 720 days old. Prior to that, our policy was to recognize no allowance of accounts receivable that is within 90 days old, 10% of accounts receivable that is between 90 days and 365 days old, 70% of accounts receivable that is between 365 days and 720 days old, and 100% of accounts receivable that is greater than 720 days old.

We recognize bad debt expenses per actual write-offs as well as changes of allowance for doubtful accounts. To the extent that our current allowance for doubtful accounts is higher than that of the previous period, we recognize a bad debt expense for the difference during the current period, and, when the current allowance is lower than that of the previous period, we recognize a bad debt benefit for the difference. The allowance for doubtful accounts was $18.3 million as of September 30, 2021 and $18.2 million as of December 31, 2020. The changes in the allowances for doubtful accounts during the three months ended September 30, 2021 and 2020 were as follows: 

Loss from Operations

Our operating loss for the three months ended September 30, 2021 was $0.8 million, compared to $1.0 million during the same period in 2020.

Net Interest Expense

Net interest expense was both $0.06 million for the three months ended September 30, 2021 and 2020, respectively.

Net Loss

Net loss for the three months ended September 30, 2021 was $0.8 million, as compared to $1.0 million for the same period a year ago. The improvement in net loss was mainly the result of the decrease in selling expenses in the three months ended September 30, 2021.

Loss per basic and diluted common share was both $0.02 for the three months ended September 30, 2021 and 2020, respectively.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 47,339,557 for the three months ended September 30, 2021, and 43,579,557 for the three months ended September 30, 2020.

Results of operations for the nine months ended September 30, 2021

Revenue

Revenue was $6.8 million and $7.9 million for the nine months ended September 30, 2021 and 2020, respectively.  

Set forth below are our revenues by product category in millions (USD) for the nine months ended September 30, 2021 and 2020, respectively, excluding the one-time revenue from the trading of COVID-19 testers during such period:

The most significant revenue increase in terms of dollar amount was in our “CNS Cerebral & Cardio Vascular”, which generated $1.93 million in sales revenue in the nine months ended September 30, 2021 compared to $1.45 million in the same period a year ago, an increase of $0.48 million. This increase was mainly due to sales increase of Alginic Sodium Diester Injection.

Sales of our “Anti-Viral/ Infection & Respiratory” product category, which generated $3.50 million in sales revenue in the nine months ended September 30, 2021 compared to $3.33 million in the same period a year ago, represented an increase of $0.17 million that was mainly caused by foreign currency exchange gains.

Sales of our “Digestive Diseases” product category generated $0.27 million and $0.29 million in the nine months ended September 30, 2021 and 2020, respectively.

Sales of “Other” product category generated $1.01 and $1.18 million in sales revenue in the nine months ended September 30, 2021 and 2020, respectively. The decrease was mainly caused by the decrease in sales of vitamin B6.

For the nine months ended September 30, 2021, revenue breakdown by product category remained similar to that of the same period in 2020. Sales of the “Anti-Viral/Infection & Respiratory” products category represented 52% and 53% of total sales in the nine months ended September 30, 2021 and 2020, respectively. The “CNS Cerebral & Cardio Vascular” category represented 29% and 23% of total revenue in the nine months ended September 30, 2021 and 2020, respectively. The “Digestive Diseases” category represented 4% and 5% of total revenue in the nine months ended September 30, 2021 and 2020. And the “Other” category represented 15% and 19% of revenues in the nine months ended September 30, 2021 and 2020, respectively.

Cost of Revenue

For the nine months ended September 30, 2021, our cost of revenue was $6.7 million, or 99.3% of total revenue, comparing to $6.5 million, or 82.5% of total revenue, in the same period in 2020. The increase in cost of revenue was mainly caused by the increase in the price of some raw materials and overall packaging materials that meet the heightened environmental standards issued by the government. The increased percentage of cost to revenue was mainly due to (a) the impact of foreign trade of COVID-19 testers in the second quarter of 2020, which has a higher margin, and (b) impact of higher costs of pharmaceuticals.

Gross Profit and Gross Margin

Gross profit for the nine months ended September 30, 2021 was $0.05 million, compared to of $1.4 million in the same period in 2020. Our gross profit margin in the nine months ended September 30, 2021 was 0.7% compared to 17.5% in the same period in 2020. The decrease in our gross profit margin was mainly a result of a one-time foreign trade of COVID-19 testers we completed in the second quarter of 2020, which has a higher margin. In addition, we experienced price drops for some major products during this period.

Selling Expenses

Our selling expenses for the nine months ended September 30, 2021 and 2020 were $1.0 million and $1.7 million, respectively. Selling expenses accounted for 14.2% of the total revenue in the nine months ended September 30, 2021 compared to 21.5% in the same period in 2020. 

General and Administrative Expenses

Our general and administrative expenses were both $0.74 million for the nine months ended September 30, 2021 and 2020, respectively. Our general and administrative expenses accounted for 15.4% and 12.6% of our total revenues in the nine months ended September 30, 2021 and 2020, respectively.

Research and Development Expenses

Our research and development expenses for the nine months ended September 30, 2021 and 2020 were $0.26 million and $0.12 million, respectively, representing an increase of $0.14 million compared to the same period of last year.

Bad Debt (Benefit) Expenses

Our bad debt benefit was $4,593 for the nine months ended September 30, 2021, and bad debt expense was $42,314 for the nine months ended September 30, 2020.

The changes in the allowances for doubtful accounts during the nine months ended September 30, 2021 and 2020 were as follows:

Loss from Operations

Our operating loss for the nine months ended September 30, 2021 was $2.2 million, compared to $1.5 million in the same period in 2020.

Net Interest Expense

Net interest expense for the nine months ended September 30, 2021 was $0.21 million, compared to $0.18 million for the same period in 2020.

Net Loss

Net loss for the nine months ended September 30, 2021 was $2.4 million, as compared to net loss of $1.7 million for the nine months ended September 30, 2020. The increase in net loss is mainly due to the continuous decline in the sales price of our main products, such as Cefaclor for the nine months ended September 30, 2021, and the continuous rise in the price of some main raw materials in our portfolio; on the other hand, there was a one-time foreign trade of COVID-19 testers with higher gross margin we completed in this period 2020.

For the nine months ended September 30, 2021, loss per basic and diluted common share was $0.05, compared to loss per basic and diluted common share of $0.04 for the nine months ended September 30, 2020.

The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 47,339,557 for the nine months ended September 30, 2021, and 43,579,557 for the nine months ended September 30, 2020.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operations, bank lines of credit, and advances from our Chairperson, Chief Executive Officer and Interim Chief Financial Officer. We received advances from the CEO totaling $1,147,192 and repaid $251,334 of the advances during the nine months ended September 30, 2021. Total amounts owed were $1,702,705 and $779,861 and are recorded as “Other payables – related parties” on the accompanying condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, respectively.

Our cash and cash equivalents were $0.5 million, representing 2.5% of our total assets, as of September 30, 2021, as compared to $1.0 million, representing 4.5% of our total assets as of December 31, 2020. All of the $0.5 million of cash and cash equivalents as of September 30, 2021 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.

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 8,000,000 (approximately $1.2 million) has been advanced on December 31, 2020. The loan bears interest at a rate of 4.25% per annum. Advances on the line of credit shall be repaid in installments semi-annually for two years from the date of the advance. The first repayment of RMB 500,000 (approximately $0.07 million) was made on October 20, 2020, the second repayment of RMB 300,000 (approximately $0.06 million) was made in January 2021, the third repayment of RMB 500,000 (approximately $0.08 million) was made in April 20, 2021, and the forth repayment of RMB 300,000 (approximately $ 0.05 million) was made in July 20, 2021, and the fifth repayment of RMB 500,000 (approximately $ 0.08 million) was made in October 20, 2021.

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 $1.3 million), all of which has been advanced. The loan bears interest at a rate of 4.05% per annum. The company fully repaid this RMB 8,500,000 (approximately $1.3 million) on June 21, 2021, and on June 25, 2021, entered into a new loan agreement with Bank of Communications with a one year term, and an annual interest rate of 4.17%.

In addition, we entered into an eight-year construction loan facility on September 21, 2013. The total construction loan facility amount was RMB 80 million (approximately $13 million), which had been fully utilized through May 7, 2014. As of December 31, 2020, the construction loan installments to be repaid within the next 12 months are approximately $2.3 million. The total balance of the construction loan facility was RMB 14 million ($2.2 million) as of June 30, 2021, which is all due within 12 months. On July 10, 2021, we fully repaid such principal of RMB 80 million (approximately $12.4 million) of the construction loans per the payback schedule. On September 18, 2021, the company signed a one-year loan agreement of RMB 10 million (about US $1.55 million) with the Bank of China, with an annual interest rate of 3.85%, with the company’s GMP preparation building and land as collateral, and our President and CEO, Ms. Zhilin Li provided a guarantee.

The Company also obtained a line of credit of RMB 3,200,000 (approximately $0.5 million) from China CITIC Bank in September 2020 and obtained an advance of RMB 2,343,340 (approximately $344,098), and the remaining of RMB 856,660 (approximately $125,793) in October 2020 under this line. The loan bears interest at a rate of 4.50% per annum. The line of credit is due in one year on the anniversary date of the advance. The company paid off the loan of RMB 3.2 million on September 17, 2021, and obtained the loan on September 23, 2021. The maturity date of the new loan is September 22, 2022. On July 12, 2021, the Company obtained a short-term loan of RMB 3 million (approximately US$460,000) from Haikou HaiHongXin microfinance Co., Ltd., with a monthly interest rate of 1.5%. The company paid off the loan in September 2021. These factors raised substantial doubts about the Company’s ability to continue as a going concern. Cash flow generated from operating activities, lines of credit, and advances from our CEO were used to fund our daily operating expenses as well as the repayment of our loan facility.

Our net accounts receivable was $0.4 million and $0.5 million as of September 30, 2021 and December 31, 2020, respectively.

Total inventory was $3.1 million and $3.7 million as of September 30, 2021 and December 31, 2020, respectively.

Although the Company obtained lines of credit in April, June, and September 2020, there can be no assurance that the Company will be able to achieve its future strategic to accelerate the launch of nutrition products raising substantial doubt about its ability to continue as a going concern. Although our Chairperson and Chief Executive Officer had advanced funds for working capital during the first nine months ended September 30, 2021, there can be no assurances that this will be the case in the future. 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.  There can be no assurance that any additional financing will be available on acceptable terms, if at all.

Operating Activities

Net cash used in operating activities was $0.05 million in the nine months ended September 30, 2021, as compared to net cash used by operating activities of $0.37 million for the same period in 2020.

Our net accounts receivable was $0.4 million and $0.5 million as of September 30, 2021 and December 31, 2020.

Total inventory was $3.1 million, as of September 30, 2021, and $3.7 million as of December 31, 2020.

Investing Activities

During the nine months ended September 30, 2021, net cash used in investing activities was $0.43 million as compared to $1.10 million for the nine months ended September 30, 2020. The decrease was mainly due to the purchase of mask production lines in the same period in 2020.

Financing Activities

Cash flow used in financing activities was $0.02 million in the nine months ended September 30, 2021, as compared to $0.63 million generated in the nine months ended September 30, 2020. The financing activities that occurred in the nine months ended September 30, 2021 were primarily borrowing from and repayment to financial institutions, and loans from related parties.

According to relevant PRC laws, companies registered in the PRC, including our PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of their after-tax net income, as determined under the accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach fifty percent (50%) of the companies’ registered capital prior to their remittance of funds out of the PRC.  Allocations to these reserves and funds can only be used for specific purposes and are not transferrable to the parent company in the form of loans, advances or cash dividends. As of September 30, 2021 and December 31, 2020, Helpson’s net assets totaled $3,633,000 and $5,777,000, 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 September 30, 2021 and December 31, 2020, respectively. The amount that Helpson must set aside for the statutory surplus fund accounts is 224% and 141% of its total net assets.  There were no allocations to the statutory surplus reserve accounts during the nine months ended September 30, 2021.

The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China.  Our businesses and assets are primarily denominated in RMB.  All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires the submission of a payment application form together with certain invoices and executed contracts. The currency exchange control procedures imposed by Chinese government authorities may restrict the ability of Helpson, our Chinese subsidiary, to transfer its net assets to our parent company through loans, advances or cash dividends.

Off-Balance Sheet Arrangements

As of September 30, 2021, 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 (the “SEC”)’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 September 30, 2021 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, 2020, filed with the SEC on March 26, 2021. 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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