NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 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 acceptance notes 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 $364,989 and $494,548 for the three months ended June 30, 2017, respectively and $725,052 and $1,075,848
for the six months ended June 30, 2017 and 2016, respectively.
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 six months ended June 30, 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.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
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 six months ended June 30, 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. During the three
and six months ended June 30, 2017 and 2016 the Company recognized an impairment related to Advances for purchases of intangible
assets in the amount of $977,980 and $822,539, respectively as more fully discussed in Note 5.
Property,
Plant and Equipment
– Property, plant 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 and six months ended June
30, 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.
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.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The Company has not yet determined
its method of transition and is evaluating the impact that this guidance will have on its 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.
From
time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs 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 condensed consolidated financial statements upon
adoption.
NOTE
2 – INVENTORY
Inventory
consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
10,853,166
|
|
|
$
|
11,562,388
|
|
Work in process
|
|
|
698,455
|
|
|
|
360,550
|
|
Finished goods
|
|
|
1,677,334
|
|
|
|
1,530,641
|
|
|
|
|
13,228,955
|
|
|
|
13,453,579
|
|
Obsolescence reserve
|
|
|
(5,969,982
|
)
|
|
|
(6,142,640
|
)
|
Total Inventory
|
|
$
|
7,258,973
|
|
|
$
|
7,310,939
|
|
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
NOTE
3 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2016
|
|
Permit of land use
|
|
$
|
415,629
|
|
|
$
|
405,645
|
|
Building
|
|
|
9,651,565
|
|
|
|
9,419,700
|
|
Plant, machinery and equipment
|
|
|
26,845,231
|
|
|
|
26,151,029
|
|
Motor vehicle
|
|
|
317,402
|
|
|
|
309,777
|
|
Office equipment
|
|
|
189,169
|
|
|
|
182,718
|
|
Total
|
|
|
37,418,996
|
|
|
|
36,468,869
|
|
Less: accumulated depreciation
|
|
|
(13,338,670
|
)
|
|
|
(11,501,421
|
)
|
Property, Plant and Equipment, net
|
|
$
|
24,080,326
|
|
|
$
|
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 June 30, 2017 and 2016, depreciation expense was $770,458 and $921,983, respectively.
For the six months ended June 30, 2017 and 2016, depreciation expense was $1,535,072 and $1,594,307, 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 six months ended June 30, 2017 and 2016
and no costs were reclassified from advances to intangible assets during the six months ended June 30, 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 $42,528 and $67,025, respectively for the three months
ended June 30, 2017 and 2016 and $93,308 and $133,966 for the six months ended June 30, 2016 and 2015, 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.
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 six months ended June 30, 2017 and 2016.
Intangible
assets consisted solely of CFDA approved medical formulas as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2016
|
|
Gross carrying amount
|
|
$
|
4,981,438
|
|
|
$
|
4,861,766
|
|
Accumulated amortization
|
|
|
(4,528,062
|
)
|
|
|
(4,327,084
|
)
|
Net carrying amount
|
|
$
|
453,376
|
|
|
$
|
534,682
|
|
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
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 second quarter of 2017, based on the Company's monitoring and assessment process, the Company determined that advance payments
to an independent laboratory were impaired. As a result, the Company recognized an impairment loss for the advance payments made
to the laboratory in the amount of $977,980. During the second quarter of 2016, based on the Company's monitoring and assessment
process, the Company determined that two advance payments to two independent laboratories were impaired. As a result, the
Company recognized an impairment loss for the advance payments made to these laboratories in the amount of $822,539.
As
of June 30, 2017, the Company was obligated to pay laboratories and others approximately $3,100,000 upon the completion of various
phases of contracts to obtain CFDA production approval of medical formulas.
NOTE
6 – RELATED PARTY TRANSACTIONS
A
member of the Company’s board of directors had previously advanced the Company an aggregate amount of $1,354,567 as of June
30, 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 for the three months ended June
30, 2017 and 2016 was $3,386 and $3,386. Total interest expense for the six months ended June 30, 2017 and 2016 was $6,773 and
$6,773, respectively.
NOTE
7 – BANKER'S ACCEPTANCE NOTES PAYABLE
In
April 2016, the Company entered into a Banker's Acceptance Note Agreement with a bank. Pursuant to the terms of the agreement,
the Company can issue banker's acceptance notes to any third party as payment of amounts owing to that third party. The Company
is required to deposit with the bank an amount equal to the amounts represented by the banker's acceptance notes issued to the
third parties. The amount of these deposited balances is shown as "Restricted cash" on the accompanying balance sheets
as of June 30, 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 acceptance
notes. In addition, the agreement calls for the payment of fees equal to 0.05% of the note amount to the bank. At June 30, 2017
and December 31 2016, the Company had outstanding banker's acceptance notes in the amount of $2,568,895 and $1,088,879, respectively.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
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. 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. At June 30, 2017, the loan 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 $1,320,000
(9,000,000 RMB) being due in July 2017. As of June 30, 2017, the Company had no additional amounts available to it under this
facility. During July of 2017, the Company made the required payment of RMB 9,000,000 (approximately $1,320,000).
Principal
payments required for the next five years as of June 30, 2017 are as follows:
Twelve Months Ending June 30,
|
|
Amount
|
|
2018
|
|
|
1,328,043
|
|
2019
|
|
|
2,213,405
|
|
2020
|
|
|
2,213,405
|
|
2021
|
|
|
2,213,405
|
|
2022
|
|
|
2,213,407
|
|
|
|
$
|
10,181,665
|
|
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 June 30, 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.
Undistributed
earnings of Helpson, the Company’s foreign subsidiary, since its acquisition, amounted to approximately $28.4 million as
of June 30, 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 June 30, 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.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
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:
Year
|
|
Enterprise Income Tax Rate
|
|
2015
|
|
|
15
|
%
|
2016
|
|
|
15
|
%
|
Thereafter
|
|
|
25
|
%
|
The
provision for income taxes consisted of the following:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
30,574
|
|
|
|
21,416
|
|
|
|
60,908
|
|
|
|
44,244
|
|
Total income tax expense
|
|
$
|
30,574
|
|
|
$
|
21,416
|
|
|
$
|
60,908
|
|
|
$
|
44,244
|
|
As
of June 30, 2017, the Company had net operating loss carryforwards for PRC tax purposes of approximately $53.9 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 $4.8 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 June 30, 2017 and December 31, 2016. Therefore,
the Company provided for a valuation allowance against its deferred tax assets of $22,920,810 and $21,452,802 as of June 30, 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.
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 June 30,
2017:
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
Reporting Date Using
|
|
Description
|
|
June 30,
2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Banker's acceptance notes
|
|
$
|
16,692
|
|
|
$
|
-
|
|
|
$
|
16,692
|
|
|
$
|
-
|
|
Total
|
|
$
|
16,692
|
|
|
$
|
-
|
|
|
$
|
16,692
|
|
|
$
|
-
|
|
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (UNAUDITED)
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 of Directors 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 June 30, 2017, there were 175,000 shares of restricted stock granted and outstanding under the
Plan. No options were outstanding as of June 30, 2017 under the Plan.
There
were no securities issued from the Plan during each of the six months ended June 30, 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 six months ended June 30, 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 June 30, 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 six months ended June 30, 2017, no customer accounted for more than 10% of sales and two customers accounted for 46.8% and
13.9% of accounts receivable, respectively. Three suppliers accounted for 25.1%, 19.1% and 16.7% of raw material purchases,
respectively.
For
the six months ended June 30, 2016, no customer accounted for more than 10% of sales and one supplier accounted for 23.5% of raw
material purchases, respectively. At June 30, 2016, three customers accounted for 28.2%, 11.3% and 10.9% of accounts receivable,
respectively.