The accompanying unaudited condensed
consolidated balance sheets, statements of operations and comprehensive income, and statements of cash flows and the related notes
thereto, have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S.
GAAP") for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the disclosures required by U.S. GAAP for complete financial statements. The
financial statements reflect all adjustments, consisting only of normal, recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation for the interim periods.
The accompanying financial statements
should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2016.
The results of operations for the three-month
period ended March 31, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year or any other
period.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2017
AND 2016 (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.
On
December 31, 2012, China Pharma Holdings, Inc. consummated a reincorporation merger for the purpose of changing its state of incorporation
from Delaware to Nevada pursuant to the terms and conditions of an Agreement and Plan of Merger dated December 27, 2012. The
reincorporation merger was approved by stockholders holding the majority of the Company’s outstanding shares of common stock
on December 21, 2012.
The
Foreign Investment Industrial Catalogue
(the “Catalogue”) jointly issued by China’s Ministry of
Commerce and the National Development and Reform Commission (the latest version is the 2012 version, effective January 30, 2012)
classified various industries/businesses into three different categories: (i) encouraged for foreign investment; (ii) restricted
to foreign investment; and (iii) prohibited from foreign investment. For any industry/business not covered by any of these three
categories, they will be deemed industries/businesses permitted for foreign investment. A typical foreign investment ownership
restriction in the pharmaceutical industry is that a foreign investment enterprise (the “FIE”) shall not have the
whole or majority of its equity interests owned by a foreign owner if the FIE establishes more than 30 branch stores and distributes
a variety of brands in those franchise stores, which is not the case for the Company’s business.
Helpson
manufactures and markets generic and branded pharmaceutical products as well as biochemical products primarily to hospitals and
private retailers located throughout the PRC. The Company believes Helpson’s business is not subject to any ownership restrictions
prescribed under the Catalogue. 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 Establishing of Enterprises with Foreign Investment in the
PRC on the same day and 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.
Consolidation and Basis of Presentation
– The accompanying financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America and are expressed in United States dollars. The accompanying consolidated financial statements
include the accounts and operations of the Company and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in the consolidation.
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.
Accounting Estimates
-
The
methodology used to prepare for the Company’s financial statements is in conformity with the accounting principles generally
accepted in the United States of America, which requires the management of the Company (“Management”) 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.
Cash and Cash Equivalents
–
Cash and cash equivalents include interest bearing and non-interest bearing bank deposits, money market accounts, and short-term
banker’s acceptances purchased with maturities of three months or less.
Restricted Cash
–
Restricted
cash includes cash that has been deposited with a bank to satisfy obligations outstanding under banker's acceptance notes issued
by the Company as discussed in Note 7.
Trade Accounts Receivable and
Allowance for Doubtful Accounts –
Trade accounts receivables are carried at the original invoiced amounts less an
allowance for doubtful accounts. The allowances for doubtful accounts are calculated based on a detailed review of certain individual
customer accounts and an estimation of the overall economic conditions affecting the Company's customer base. The Company reviews
a customer's credit history before extending credit to the customer. If the financial condition of its customers were to deteriorate,
resulting in an impairment of their ability to make payments, additions to the allowance would be required. A provision is made
against accounts receivable to the extent they are considered unlikely to be collected. Charges to bad debt expense totaled $360,063
and $581,300 for the three months ended March 31, 2017 and 2016, respectively.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2017
AND 2016 (UNAUDITED)
Trade accounts receivable that have
been fully allowed for and determined to be uncollectible are charged against the allowance in the period the determination is
made. The Company charged off uncollectable trade accounts receivable balances in the amount of $0 against the allowance for both
the three months ended March 31, 2017 and 2016, respectively. It is common practice in the pharmaceutical industry in the PRC
for receivables to extend beyond one year. Customer balances outstanding for more than one year are allowed for at a greater rate
when calculating the allowance for doubtful accounts.
Advances to Suppliers and Advances
from Customers
– Common practice in the pharmaceutical industry in the PRC is to make advances to suppliers for
materials and to receive advances from customers for finished products. Advances to suppliers are applied to trade accounts payable
when the materials are received. Advances received from customers are applied against trade accounts receivable when finished
products are sold. The Company reviews a supplier's credit history and background information before advancing a payment. If the
financial condition of its suppliers were to deteriorate, resulting in an impairment of their ability to deliver goods or provide
services, the Company would recognize bad debt expense in the period they are considered unlikely to be collected. The Company
recognized no bad debt expense for the three months ended March 31, 2017 and 2016, respectively.
Inventories –
Inventories consist of raw materials, work in process and finished goods and are stated at the lower of cost or market. Cost is
determined using a weighted average. For work in process and manufactured inventories, cost consists of raw materials, direct
labor and an allocated portion of the Company’s production overhead. The Company writes down excess and obsolete inventory
to its estimated net realizable value based upon assumptions about future demand and market conditions. For finished goods and
work in process, if the estimated net realizable value for an inventory item, which is the estimated selling price in the ordinary
course of business, less reasonably predicable costs to completion and disposal, is lower than its cost, the specific inventory
item is written down to its estimated net realizable value. Market for raw materials is based on replacement cost. Provisions
for inventory write-downs are included in cost of revenues in the consolidated statements of operations. Once written down, inventories
are carried at this lower cost basis until sold or scrapped.
Valuation of Long-Lived Assets
– The carrying values of long-lived assets are reviewed for impairment annually or whenever events or changes in
circumstances indicate that the carrying values may not be recoverable. When such an event occurs, the Company projects the undiscounted
cash flows to be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections
indicate that the carrying value of an asset will not be recovered, it is reduced by the estimated excess of the carrying value
over the projected discounted cash flows estimated to be generated by the asset. There was no impairment adjustment required for
the three months ended March 31, 2017 and 2016.
Property and Equipment
– Property and equipment are stated at cost. Maintenance and repairs are charged to expenses as incurred and major improvements
are capitalized. Gains or losses on sale, trade-in or retirement are included in operations during the period of disposition.
Depreciation relating to office equipment was included in general and administrative expenses, while all other depreciation was
included in cost of revenue.
Revenue Recognition
–
Revenue is considered earned when the Company obtains persuasive evidence of an arrangement with the customer, when delivery of
the products has occurred, when the sales price is fixed or determinable, and when collectability is reasonably assured. Delivery
does not occur until products have been shipped to the customer, the risk of loss has transferred to the customer and customer
acceptance has been obtained, customer acceptance provisions have lapsed, or the Company obtains objective evidence that the criteria
specified in the customer acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable
until all contingencies related to the sale have been resolved. Revenue is deferred when collectability is not considered to be
reasonably assured.
Cost of Revenues
–
Cost of revenues includes wages, materials, depreciation, handling charges, and other expenses associated with the manufacture
and delivery of products.
Research and Development
– Research and development expenditures are recorded as expenses in the period in which they occur.
Basic and Diluted Loss per Common
Share
-
Basic loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding
during the period. Diluted loss per share is calculated to give effect to potentially issuable dilutive common shares. There were
no potential dilutive common shares outstanding during the three months ended March 31, 2017 and 2016, respectively.
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.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2017
AND 2016 (UNAUDITED)
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 new Bankruptcy Law in August 2006, effective June 1, 2007,
which contains provisions for the implementation of measures for the bankruptcy of PRC banks. In the event that bankruptcy laws
are enacted for banks in the PRC, the Company’s deposits may be at a higher risk of loss.
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.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
"Revenue
from Contracts with Customers"
(ASU 2014-09), which contains new accounting literature relating to how and when
a company recognizes revenue. Under ASU 2014-09, a company recognizes revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods
and services. In July 2015, the FASB decided to delay the effective date of the new standard by one year; as a result, the
new standard will be effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption will
be permitted, but no earlier than 2017 for calendar year-end entities.
The standard allows for two transition
methods - retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially
applying the standard recognized at the date of initial adoption. We have not yet determined our method of transition and are
evaluating the impact that this guidance will have on our financial statements.
In February 2016, the FASB issued ASU
No. 2016-02,
Leases
, a new standard on accounting for leases. The ASU introduces a lessee model that brings most leases
on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in the
current accounting guidance as well as the FASB's new revenue recognition standard. However, the ASU eliminates the use of bright-line
tests in determining lease classification as required in the current guidance. The ASU also requires additional qualitative disclosures
along with specific quantitative disclosures to better enable users of financial statements to assess the amount, timing, and
uncertainty of cash flows arising from leases. The pronouncement is effective for annual reporting periods beginning after December
15, 2018, including interim periods within that reporting period, using a modified retrospective approach. Early adoption is permitted.
The Company has not completed an evaluation of the impact the pronouncement will have on its consolidated financial statements
and related disclosures.
In June 2016, the FASB issued Accounting
Standards Update 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, 2019, 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, 2018, including interim periods within those
fiscal years. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial
statements and related disclosures.
In August 2016, the FASB issued ASU
No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. The standard addresses the classification
and presentation of eight specific cash flow issues that currently result in diverse practices. This pronouncement is effective
for annual reporting periods beginning after December 15, 2017. The amendments in this ASU should be applied using a retrospective
approach. The Company has not completed an evaluation of the impact the pronouncement will have on its consolidated financial
statements and related disclosures, but does not expect the impact to be material.
In November 2016, the FASB issued ASU
2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”)
. The ASU requires an entity
to explain the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents on the statement
of cash flows and to provide a reconciliation of the totals in that statement to the related captions in the balance sheet when
the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance
sheet. This ASU is effective for annual and interim periods beginning after December 15, 2017, and is required to be adopted using
a retrospective approach, with early adoption permitted. The Company is currently evaluating the potential impact that the adoption
of ASU 2016-18 may have on its consolidated financial statements.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2017
AND 2016 (UNAUDITED)
Other
accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect
on the Company’s financial position, result of operations or cash flows.
NOTE 2 – INVENTORY
Inventory consisted of the following:
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Raw materials
|
|
$
|
10,796,239
|
|
|
$
|
11,562,388
|
|
Work in process
|
|
|
692,827
|
|
|
|
360,550
|
|
Finished goods
|
|
|
1,397,514
|
|
|
|
1,530,641
|
|
|
|
|
12,886,580
|
|
|
|
13,453,579
|
|
Obsolescence reserve
|
|
|
(5,900,615
|
)
|
|
|
(6,142,640
|
)
|
Total Inventory
|
|
$
|
6,985,965
|
|
|
$
|
7,310,939
|
|
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Permit of land use
|
|
$
|
408,775
|
|
|
$
|
405,645
|
|
Building
|
|
|
9,492,387
|
|
|
|
9,419,700
|
|
Plant, machinery and equipment
|
|
|
26,379,439
|
|
|
|
26,151,029
|
|
Motor vehicle
|
|
|
312,167
|
|
|
|
309,777
|
|
Office equipment
|
|
|
184,128
|
|
|
|
182,718
|
|
Total
|
|
|
36,776,896
|
|
|
|
36,468,869
|
|
Less: accumulated depreciation
|
|
|
(12,354,523
|
)
|
|
|
(11,501,421
|
)
|
Property and Equipment, net
|
|
$
|
24,422,373
|
|
|
$
|
24,967,448
|
|
Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets as follows:
Asset
|
|
Life - years
|
Permit of land use
|
|
40 - 70
|
Building
|
|
20 - 49
|
Plant, machinery and equipment
|
|
5 - 10
|
Motor vehicle
|
|
5 - 10
|
Office equipment
|
|
3-5
|
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 March 31, 2017 and 2016, depreciation expense was $764,614 and $790,254, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the cost
of medical formulas approved for production by the China Food and Drug Administration (“CFDA”). The Company did not
obtain CFDA production approval for any medical formula during the three months ended March 31, 2017 and 2016 and no costs were
reclassified from advances to intangible assets during the three months ended March 31, 2017 and 2016, respectively.
Approved medical formulas are amortized
from the date CFDA 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 $50,780 and $66,941 for the three months ended March 31, 2017 and 2016, respectively,
and 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
THREE MONTHS ENDED MARCH 31, 2017
AND 2016 (UNAUDITED)
The Company evaluates each approved
medical formula for impairment at the date of CFDA approval, when indications of impairment are present and at the date of each
financial statement. The Company’s evaluation is based on an estimated undiscounted net cash flow model, considering 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 three months ended March 31, 2017 and 2016.
Intangible assets consisted solely of
CFDA approved medical formulas as follows:
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Gross carrying amount
|
|
$
|
4,899,281
|
|
|
$
|
4,861,766
|
|
Accumulated amortization
|
|
|
(4,411,237
|
)
|
|
|
(4,327,084
|
)
|
Net carrying amount
|
|
$
|
488,044
|
|
|
$
|
534,682
|
|
NOTE 5 – ADVANCES FOR PURCHASES OF INTANGIBLE ASSETS
In order to expand the number of medicines
the Company manufactured and marketed, it has entered into contracts with independent laboratories and others for the purchase
of medical formulas. Although CFDA approval had not been obtained for these medical formulas at the dates of the respective contracts,
the objective of the contracts is for the Company to purchase CFDA-approved medical formulas once the CFDA approval process is
completed. The Company received the titles to two patents that relate to medical formulas currently in the CFDA approval process
for the year end December 31, 2013. These patents have not expired.
Prior to entering into contracts with
the Company, laboratories typically are required to complete all research and development to determine the content of the
medical formula and the method to produce the generic medicine. The application to the CFDA for production approval must be made
by the production facility that will produce the related product. As a result, a contract typically provides that the Company
buys the medical formula from the laboratory and the laboratory is required to assist the Company in applying for and obtaining
the production approval from the CFDA.
A typical CFDA approval process for
the production of a generic medical product involves a number of steps that generally require three to five years to complete.
If the medical formula is purchased at the point when the generic medical product receives the CFDA’s approval for a clinical
study, which is very typical for the Company, the clinical study that follows will usually take from one and a half to three years
to complete. After completing the clinical study, the results are submitted to the CFDA and a production approval application
is filed with the CFDA. In most cases, it will take between eight to eighteen months to prepare and submit the production approval
application and obtain CFDA approval. Upon approving the generic medical product, the CFDA issues a production certificate and
the Company can commence the production and sales of the generic medical product. As a result of this process, CFDA approval is
expected to be received in approximately two to five years from the date the Company signs the medical formula contracts.
Under the terms of the contracts, the
laboratories are required to assist the Company in obtaining production approval for the medical formulas from the CFDA. Management
monitors the status of each medical formula on a regular basis in order to assess whether the laboratories are performing adequately
under the contracts. If a medical product is not approved by the CFDA, 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 CFDA are recorded as
advances for purchases of intangible assets. During the fiscal year of 2016, with CFDA's new regulations on scrutiny procedures
in connection with its review of production applications and based on the Company's monitoring and assessment process, the Company
determined five advanced payments to five independent laboratories were impaired. As a result, the Company recognized an impairment
loss for the advances made to these laboratories in the amount of $3,962,141.
As of March 31, 2017, the Company was
obligated to pay laboratories and others approximately $4,400,000 upon the completion of various phases of contracts to obtain
CFDA production approval of medical formulas.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2017
AND 2016 (UNAUDITED)
NOTE 6 – RELATED PARTY TRANSACTIONS
A member of the Company’s board
of directors (the “Board”) had previously advanced the Company an aggregate amount of $1,354,567 as of March 31, 2017
and December 31, 2016 which are recorded as Other payables – related parties on the accompanying consolidated balance sheets.
The advances bear interest at a rate of 1.0% per year. Total interest expense of $3,386 was recognized for each of
the three months ended March 31, 2017 and 2016.
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 (the "Banker's 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 Notes issued to the third parties. The amount
of these deposited balances is shown as "Restricted cash" on the accompanying balance sheets as of March 31, 2017 and
December 31, 2016. 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 Notes. In addition, the agreement
calls for the payment of fees equal to 0.05% of the note amount to the bank. At March 31, 2017 and December 31 2016, the Company
had outstanding Banker's Acceptance Notes in the amount of $1,718,823 and $1,088,879, respectively.
NOTE 8 – CONSTRUCTION LOAN
FACILITY
The Company obtained a construction
loan facility in the amount of RMB 80,000,000 (approximately $13 million) from a construction loan facility dated June 21, 2013.
The loan facility is for an eight-year term, which commenced on July 11, 2013, the initial draw-down date and is from the same
bank that currently provides the line of credit as discussed in Note 7. 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 currently bears weighted interest at 5.73%, 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. On July 10, 2015 the interest rate was
adjusted to 5.94% and on July 10, 2016 the rate was further adjusted to 5.39%. The loan required interest only payments
for the first two years. Beginning July 11, 2015, the balance of the principal is due in at least two (2) annual installments
with the first annual payment being due within the 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, 2022 on the identical terms as described above
for 2015. During the first quarter of 2017, the Company made a principal payment in the amount of approximately $145,000 (RMB1,000,000)
with the remaining annual principal payment of approximately $1,306,000 (9,000,000 RMB) being due in July 2017. As of March 31,
2017, the Company had no additional amounts available to it under this facility.
Principal payments required for the
next five years as of March 31, 2017 are as follows:
Year
|
|
Amount
|
|
2017
|
|
|
|
1,306,140
|
|
|
2018
|
|
|
|
2,176,901
|
|
|
2019
|
|
|
|
2,176,901
|
|
|
2020
|
|
|
|
2,176,901
|
|
|
2021
|
|
|
|
2,176,901
|
|
|
|
|
|
|
$10,013,744
|
|
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 March 31, 2017 and December 31, 2016 approximated
its fair value because the underlying instrument bears an interest rate that approximated current market rates.
NOTE 9 - 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 on deferred tax assets and liabilities of a change in tax laws or rates is recognized in
income in the period that includes the enactment date.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2017
AND 2016 (UNAUDITED)
Undistributed
earnings of Helpson, the Company’s foreign subsidiary, since its acquisition, amounted
to approximately $30.5 million as of March 31, 2017. Those earnings, as well as the investment
in Helpson of approximately $23.3 million, are considered to be indefinitely reinvested
and, accordingly, no U.S. federal or state income taxes have been provided thereon. Upon
distribution of those earnings in the form of dividends or otherwise, the Company would
be subject to U.S. federal and state income taxes (net of an adjustment for foreign tax
credits) and withholding taxes payable to the PRC. Determination of the amount of unrecognized
deferred U.S. income tax liability is not practical because of the complexities associated
with its hypothetical calculation; however, unrecognized foreign tax credits may be available
to reduce a portion of the U.S. tax liability.
Liabilities are established for uncertain
tax positions expected to be taken in income tax return 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 March 31, 2017, the Company has not identified any uncertain tax positions
that it has taken. U.S. income tax returns for the years ended December 31, 2013 through December 31, 2016 and the Chinese income
tax return for the year ended December 31, 2016 are open for possible examination.
On March 16, 2007, the National People’s
Congress of China passed the Enterprise Income Tax Law (EIT Law) and on December 6, 2007, the State Council of China issued the
Implementation Regulations for the EIT Law which took effect on January 1, 2008. The EIT Law and Implementation Regulations
Rules impose a unified EIT of 25% on all domestic-invested enterprises and Foreign Invested Entities, or FIEs, unless they qualify
under certain limited exceptions.
The Company is located in a special
region, which had a 15% corporate income tax rate before the new EIT Law. The new EIT Law abolished the preferential corporate
income tax rate in the special region. The Company transitioned to the new 25% tax rate over a five year period which began on
January 1, 2008. During 2010, the Company applied for and received a favorable tax rate of 15% for fiscal 2011 through 2013 due
to its status in the PRC as a high technology enterprise. In 2013, the Company again applied for and received the same favorable
tax rate for 2014 to 2016. The recent net losses put the Company in an unfavorable position for the potential renewal
of "National High-Tech Enterprise" status for 2017. After evaluating the feasibility of the renewal in 2016, the
Company has decided not to renew this status. Under the current tax law in the PRC, the Company is and will be subject
to the following enterprise income tax rates:
|
|
Enterprise
Income
Tax
Rate
|
Year
|
|
2016
|
|
15%
|
2017
|
|
25%
|
Thereafter
|
|
25%
|
The provision for income taxes consisted
of the following:
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
30,334
|
|
|
|
22,828
|
|
Total income tax expense
|
|
$
|
30,334
|
|
|
$
|
22,828
|
|
As of March 31, 2017, the Company had
net operating loss carryforwards for PRC tax purposes of approximately $52.2 million which are available to offset any future
taxable income through 2022. These carryforwards begin to expire in 2018. The Company also has net operating losses for United
States federal income tax purposes of approximately $4.6 million which are available to offset future taxable income, if any,
through 2037.
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 March 31, 2017 and December 31, 2016. Therefore, the Company provided for a valuation allowance
against its deferred tax assets of $21,963,335 and $21,452,802 as of March 31, 2017 and December 31, 2016, 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.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2017
AND 2016 (UNAUDITED)
NOTE
10 – 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. 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 derivative warrant liability on a recurring basis because fair value is the primary measure for
accounting. The Company also uses fair value to measure the value of the banker's acceptance notes it holds. The Company
values its derivative warrants using a valuation method explained above. The banker's acceptance notes are recorded
at cost which approximates fair value. As of December 31, 2016, the Company had no banker's acceptance notes to be
recorded at fair value. The Company held the following assets and liabilities recorded at fair value as of March 31, 2017:
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
|
Reporting
Date Using
|
Description
|
|
|
March
31, 2017
|
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
Banker's acceptance notes
|
|
$
|
14,513
|
|
|
$
|
—
|
|
|
$
|
14,513
|
|
|
$
|
—
|
|
Total
|
|
$
|
14,513
|
|
|
$
|
—
|
|
|
$
|
14,513
|
|
|
$
|
—
|
|
NOTE 11 - 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.
Employee Stock Options
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. 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 March
31, 2017, there were 175,000 shares of restricted stock granted and outstanding under the Plan. No options were outstanding
as of March 31, 2017 under the Plan.
There were no securities issued from the Plan during
each of the three months ended March 31, 2017 and 2016.
The Company recognized no compensation
expense related to the awards of common shares and the grants and modifications of stock options during each of the three months
ended March 31, 2017 and 2016.
The fair value of each option award
is estimated on the date of grant using the Black-Scholes Option Pricing Model. Expected volatility is based on the historical
volatility of the Company’s common stock prices. The Company uses historical data to estimate employee termination rates.
The expected term of options granted is determined by the simplified method, which is one-half of the original contractual term.
The simplified method is used due to the lack of historical share option exercise data to provide a reasonable basis upon which
to estimate expected term. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.
As of March 31, 2017, there was no remaining
unrecognized compensation expense related to stock options or restricted stock grants.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
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.
NOTE 13 – CONCENTRATIONS
For the three months ended March 31,
2017, no customer accounted for more than 10% of sales and two customers accounted for 46.2% and 15% of accounts receivable. Four
suppliers accounted for 23.7%, 17.3%, 13.6% and 12.7% of raw material purchases.
For the three months ended March 31,
2016, no customer accounted for more than 10% of sales and three customers accounted for 28.5%, 11.4% and 11.0% of accounts
receivable, respectively. No supplier accounted for greater than 10% of raw material purchases.