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 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, 2020 AND
2019 (UNAUDITED)
NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
– China Pharma Holdings, Inc., a Nevada corporation, owns 100% of Onny Investment Limited (Onny), a British
Virgin Islands corporation, which owns 100% of Hainan Helpson Medical & Biotechnology Co., Ltd (Helpson), a company organized
under the laws of the People’s Republic of China (the PRC). China Pharma Holdings, Inc. and its subsidiaries are referred
to herein as the Company.
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.
Onny acquired 100% of the ownership in
Helpson on May 25, 2005, by entering into an Equity Transfer Agreement with Helpson’s three former shareholders. The transaction
was approved by the Commercial Bureau of Hainan Province on June 12, 2005 and Helpson received the Certificate of Approval for
Establishment of Enterprises with Foreign Investment in the PRC on the same day. Helpson received its business license evidencing
its WFOE (Wholly Foreign Owned Enterprise) status on June 21, 2005.
The Company has acquired and continues to acquire well-accepted
medical formulas to add to its diverse portfolio of Western and Chinese medicines.
Liquidity and Going Concern
As of March 31, 2020, the Company had cash
and cash equivalents of $0.1 million and an accumulated deficit of $26.6 million. The Company’s Chairperson, Chief Executive
Officer and Interim Chief Financial Officer has advanced an aggregate of $742,880 at March 31, 2020 to provide working capital
and enable the Company’s 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 organization. These conditions raise substantial doubt about its ability
to continue as a going concern within one year after the date that the financial statements are issued. To alleviate the conditions
that raise substantial doubt about the Company’s ability to continue as a going concern, management plans to enhance the
sales model of advance payment, and further strengthen its collection of accounts receivable. Further, the Company is currently
exploring strategic alternatives to accelerate the launch of nutrition products. In addition, management believes that the Company’s
existing fixed assets can serve as collateral to support additional bank loans. As discussed in Note 14, in April 2020 the Company
obtained a line of credit from a bank for an aggregate amount of RMB 10,000,000 (approximately $1.4 million), of which RMB 5,000,000
(approximately $0.7 million) have been advanced to the Company. 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.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (UNAUDITED)
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.
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 necessarily 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, 2019 filed with the
Securities and Exchange Commission on March 30, 2020 (“2019 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.
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 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
$30,246 and $13,312 for the three months ended March 31, 2020 and 2019, 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 uncollectible trade accounts receivable balances in the amount of $0 against the allowance for the three
months ended March 31, 2020 and 2019, respectively. Customer balances outstanding for more than one year are allowed for at a greater
rate than more current balances when calculating the allowance for doubtful accounts.
Advances to Suppliers and Advances
from Customers – Common practice 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.
Inventory – Inventory
consists of raw materials, work in process and finished goods and is stated at the lower of cost or net realizable value. 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. Net realizable value for raw materials is based on replacement cost.
Provisions for inventory write-downs are included in the cost of revenues in the consolidated statements of operations. Inventories
are carried at this lower cost basis until sold or scrapped.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (UNAUDITED)
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. If there is uncertainty both in timing and amount,
the Company will use the projected discounted cash flows to be generated by the asset. There was no impairment loss recognized
for the three months ended March 31, 2020 and 2019.
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 recognized when a customer obtains control of promised goods or services and is recognized in an amount that
reflects the consideration that an entity expects to receive in exchange for those goods or services. In addition, the standard
requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company does not disaggregate its revenue streams as the economic factors underlying the contracts are similar and provide
no significant distinction. The amount of revenue that is recorded reflects the consideration that the Company expects to receive
in exchange for those goods. The Company applies the following five-step model in order to determine this amount: (i) identification
of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including
whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint
on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue
when (or as) the Company satisfies each performance obligation. The Company utilized the modified retrospective method of adoption
effective January 1, 2018.
The Company only applies the five-step
model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods
or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception,
the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance
obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective
performance obligation when (or as) the performance obligation is satisfied. The Company’s contracts are fixed price and
reflect standalone pricing for each items. Due to the nature of the products sold, there are no returns. Generally, the Company’s
performance obligations are transferred to customers at a point in time, typically upon buyer’s designated carrier or the
buyer picks up the goods at the Company’s warehouse.
For all reporting periods, the Company
has not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected
length of one year or less, which is an optional exemption that is permitted under the adoption rules. The Company has received
advance deposits for orders less than one year. These advances total $1,940,728 and $505,398 and are recorded as a liability on
the accompanying balance sheet as “Advances from customers” at March 31, 2020 and December 31, 2019, respectively.
Leases –The Company
determines if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset classes,
to account for each lease component of a contract and its associated non-lease components as a single lease component, rather than
allocating a standalone value to each component of a lease. For purposes of calculating operating lease obligations under the standard,
the Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company
will exercise such option. The Company’s leases do not contain material residual value guarantees or material restrictive
covenants. Operating lease expense is recognized on a straight-line basis over the lease terms.
The discount rate used to measure a lease
obligation should be the rate implicit in the lease; however, the Company’s operating leases generally do not provide an
implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value
of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would
pay to borrow on a collateralized basis over a similar term with similar payments.
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.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (UNAUDITED)
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 potentially dilutive common
shares outstanding during the three months ended March 31, 2020 and 2019, 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 Bankruptcy Law in August 2006, effective June 1, 2007, which
contains provisions for the implementation of measures for the bankruptcy of PRC banks. Company bank accounts in China are not
subject to a certain insurance coverage and will follow the provisions set forth in the PRC Bankruptcy Law should any bank where
the Company has accounts declare bankruptcy.
Interest Rate Risk –
The Company is exposed to the risk arising from changing interest rates, which may affect the ability of repayment of existing
debts and viability of securing future debt instruments within the PRC.
Reclassification –
Certain amounts in the prior period presented have been reclassified to conform to the current year presentation. There was no
impact on previously reported assets, net income or total cash flows.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments
within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of
financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified
accounting model for purchased financial assets with credit deterioration since their origination. The pronouncement will
be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not anticipate the
guidance will have a material impact on its financial statements.
In December 2019, the FASB issued ASU 2019-12,
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendment simplifies the accounting
for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes. It also clarifies certain aspects
of the existing guidance to promote more consistent application, among other things. The guidance is effective for interim and
annual reporting periods beginning within 2021 with early adoption permitted.
From time to time, the FASB or other standards
setting bodies issue new accounting pronouncements. Updates to the FASB 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 consolidated financial statements upon adoption.
NOTE 2 – INVENTORY
Inventory consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
1,923,368
|
|
|
$
|
2,113,994
|
|
Work in process
|
|
|
256,151
|
|
|
|
314,231
|
|
Finished goods
|
|
|
1,445,481
|
|
|
|
1,160,599
|
|
Total Inventory
|
|
$
|
3,625,000
|
|
|
$
|
3,588,824
|
|
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (UNAUDITED)
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Permit of land use
|
|
$
|
397,549
|
|
|
$
|
403,755
|
|
Building
|
|
|
9,231,708
|
|
|
|
9,375,817
|
|
Plant, machinery and equipment
|
|
|
26,245,097
|
|
|
|
26,309,262
|
|
Motor vehicle
|
|
|
303,595
|
|
|
|
308,334
|
|
Office equipment
|
|
|
216,093
|
|
|
|
217,058
|
|
Total
|
|
|
36,394,042
|
|
|
|
36,614,226
|
|
Less: accumulated depreciation
|
|
|
(20,625,801
|
)
|
|
|
(20,300,399
|
)
|
Property and Equipment, net
|
|
$
|
15,768,241
|
|
|
$
|
16,313,827
|
|
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. Depreciation
expense was $647,113 and $772,861 for the three months ended March 31, 2020 and 2019, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the cost of
medical formulas approved for production by the National Medical Products Administration (the “NMPA”, formerly China
Food and Drug Administration, CFDA). The Company did not obtain NMPA production approval for any new medical formulas during the
three months ended March 31, 2020 and 2019 and no costs were reclassified from advances to intangible assets during the three months
ended March 31, 2020 and 2019, respectively.
Approved medical formulas are amortized
from the date NMPA approval is obtained over their individually identifiable estimated useful life, which range from ten to thirteen
years. It is at least reasonably possible that a change in the estimated useful lives of the medical formulas could
occur in the near term due to changes in the demand for the drugs and medicines produced from these medical formulas. Amortization
expense relating to intangible assets was $8,808 and $22,622 for the three months ended March 31, 2020 and 2019, respectively,
which was included in the general and administrative expenses. Medical formulas typically do not have a residual value at the end
of their amortization period.
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 three months ended March 31, 2020 and 2019.
Intangible assets consisted solely of
NMPA approved medical formulas as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Gross carrying amount
|
|
$
|
4,764,738
|
|
|
$
|
4,839,117
|
|
Accumulated amortization
|
|
|
(4,570,964
|
)
|
|
|
(4,633,506
|
)
|
Net carrying amount
|
|
$
|
193,774
|
|
|
$
|
205,611
|
|
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (UNAUDITED)
NOTE 5 – ADVANCES FOR PURCHASES OF INTANGIBLE ASSETS
In order to expand the number of medicines
the Company manufactured and marketed, it entered into contracts with independent laboratories and others for the purchase of medical
formulas. Although NMPA approval had not been obtained for these medical formulas at the dates of the respective contracts, the
objective of the contracts was for the Company to purchase NMPA-approved medical formulas once the NMPA approval process is completed.
The Company holds the title to one valid patent that is related to one of its medical formulas. With respect to the other patent
title the Company held, the management decided not to renew the patent during 2019 as it did not have any practical value because
the related advance purchase to this pipeline product was written off as of December 31, 2018.
Prior to entering into contracts with the
Company, laboratories are typically 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 NMPA 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 NMPA.
In order to promote the standard of the
pharmaceutical industry in China in line with international standards, significant changes have taken place in the policies and
regulations in this industry in recent years. A series of policies on consistency evaluation and drug review process have been
issued, and more potential reforms and adjustments are underway. In this context, the Company believes that the uncertainties in
the timetables for obtaining NMPA production approvals for products under research are increasing.
Under the new regulations and policy environment,
the criteria for formulations’ development are more stringent. The Company must supplement and improve the corresponding
processes and standards to meet the latest requirements of NMPA in accordance with the requirements of consistency evaluation.
As a result, the Company anticipates an extended timeline on the approval process of its current pipeline products.
Under the terms of the contracts, the laboratories
are required to assist the Company in obtaining production approval for the medical formulas from the NMPA. 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 NMPA, as evidenced by their issuance of a denial letter, or if the laboratory
breaches the contract, the laboratory is required under the contract to provide a refund to the Company of the full amount of the
payments made to the laboratory for that formula, or the Company can require the application of those payments to another medical
formula with the same laboratory. As a result of the refund right, the Company is ultimately purchasing an approved medical product.
Accordingly, payments made prior to the issuance of production approval by the NMPA are recorded as advances for purchases of intangible
assets.
To date, no formula has failed to receive
NMPA production approval nor has the Company been informed or been made aware of any formula that may fail to receive such approval.
However, there is no assurance that the medical products will receive production approval, and if the Company does not receive
such approval, it will enforce its contractual rights to receive a refund from the laboratory or have the payments applied to another
medical formula with the same laboratory.
The management determined to impair all
remaining advances at December 31, 2019, but may resume the development of these formulas in the future if sufficient funding and
other favorable conditions arise.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (UNAUDITED)
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 March 31, 2020 and
December 31, 2019 which are recorded as “Other payables – related parties” on the accompanying condensed consolidated
balance sheets. The advances bear interest at a rate of 1.0% per year. Total interest expense for each of the three
months ended March 31, 2020 and 2019 was $3,386 and $3,386, respectively.
The Company received advances totaling
$25,461 during the three months ended March 31, 2020 from its Chairperson, Chief Executive Officer and Interim Chief Financial
Officer. Total amounts owed were $742,880 and $717,419 and are recorded as Other payables – related parties on the accompanying
condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively. On July 8, 2019 the Company entered
into a loan agreement in exchange for cash of RMB 4,770,000 ($674,405) with its Chairperson, Chief Executive Officer and Interim
Chief Financial Officer. The loan bears interest at a rate of 4.35% and is payable within one year of the loan agreement. Total
interest expense related to the loan for the three months ended March 31, 2020 and 2019 was $7,433. 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 $2,311,986 and $2,307,986 as of March 31, 2019 and December 31, 2019, 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 March 31, 2020 and December 31, 2019. The maximum
amount that the Company can issue under this agreement is limited to the lesser of RMB30,000,000 (approximately $4.5 million) or
the amount of cash available to deposit against the banker’s acceptance notes. In addition, the agreement calls for the payment
of fees equal to 0.05% of the note amount to the bank. As of March 31, 2020 and December 31, 2019, the Company had outstanding
banker’s acceptance notes in the amount of $331,038 and $109,908, respectively.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (UNAUDITED)
NOTE 8 – CONSTRUCTION LOAN FACILITY
The Company obtained a construction loan
facility, dated June 21, 2013, in the aggregate amount of RMB 80,000,000 (approximately $13 million). The loan facility is for
an eight-year term, which commenced on July 11, 2013, the initial draw-down date. The proceeds of the loan were used for and
are collateralized by the construction of the Company’s new production facility and the included production line equipment
and machinery. The loan bears interest based upon 110% of the PRC government’s eight-year term rate effective on the actual
draw-down date, subject to annual adjustments based on 110% of the floating rate for the same type of loan on the anniversary from
the draw-down date and its subsequent anniversary dates. The interest rate has remained at 5.39% on the anniversary
dates which were July 10, 2017, 2018 and 2019, respectively. The loan required interest only payments for the first two years.
Beginning July 11, 2015, the principal was due in at least two (2) annual installments with the first annual payment being due
within six month period after July 10, 2015 and the second annual payment being due July 10, 2016 and each following year over
the next five years through July 11, 2021 on the identical terms as described above for 2015. The Company has made all required
payments due under the loan. As of March 31, 2020, the Company had no additional amounts available to it under this facility. During
the three months ended March 31, 2020, the Company made principal payments in the amount of $143,286 (RMB 1,000,000).
Principal payments required for the remaining
term of the loan facility as of March 31, 2020 are as follows:
Year
|
|
Amount
|
|
2020
|
|
$
|
1,975,978
|
|
2021
|
|
|
2,117,119
|
|
|
|
$
|
4,093,097
|
|
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, 2020 and December 31, 2019 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 March 31, 2020 and 2019, operating lease
cost was $22,229 and $23,346, respectively and cash paid for amounts included in the measurement of lease liabilities for operating
cash flows from operating leases was $23,627 and $24,814, respectively. As of March 31, 2020 and December 31, 2019, the Company
reported operating lease right of use assets of $112,447 and $136,779, respectively and operating use liabilities of $115,777 and
$140,007, respectively. As of March 31, 2020, its operating leases had a weighted average remaining lease term of 1.27 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 March 31:
2020
|
|
|
94,510
|
|
2021
|
|
|
25,010
|
|
|
|
|
|
|
Total undiscounted cash flows
|
|
|
119,520
|
|
Less: Imputed interest
|
|
|
(3,743
|
)
|
|
|
|
115,777
|
|
Less: Operating lease liabilities, current portion
|
|
|
(90,974
|
)
|
Operating lease liabilities, net of current portion
|
|
|
24,803
|
|
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
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (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, 2019, the Company has not identified any uncertain tax positions
that it has taken. U.S. income tax returns for the years ended December 31, 2016 through December 31, 2019 and the Chinese income
tax return for the year ended December 31, 2019 are open for possible examination.
Under the current tax law in the PRC, the Company is and will
be subject to the enterprise income tax rate of 25%.
There was no provision for income taxes
for the three months ended March 31, 2020 and 2019 respectively due to continued net losses of the Company.
As of March 31, 2020, the Company had net
operating loss carryforwards for PRC tax purposes of approximately $50.4 million which are available to offset any future taxable
income through 2025. Approximately $21.6 million of these carryforwards will expire in December 2020. The Company also has net
operating losses for United States federal income tax purposes of approximately $6.3 million of which $5.1 million are available
to offset future taxable income, if any, through 2039, and $1.2 million are available for carryforward indefinitely subject to
a limitation of 80% of taxable income for each tax year.
Recent U.S. federal tax legislation, commonly
referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The
U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal
corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating
many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory
deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally
eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those differences become deductible or tax loss carry forwards are utilized. Management
considers projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment
of the level of historical taxable income and projections for future taxable income over the periods on which the deferred tax
assets are deductible or can be utilized, management believes it is not likely for the Company to realize all benefits of the deferred
tax assets as of March 31, 2020 and December 31, 2019. Therefore, the Company provided for a valuation allowance against
its deferred tax assets of $30,461,103 and $30,759,656 as of March 31, 2020 and December 31, 2019, respectively.
The Company also incurred various other
taxes, comprised primarily of business taxes, value-added taxes, urban construction taxes, education surcharges and others. Any
unpaid amounts are reflected on the balance sheets as accrued taxes payable.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (UNAUDITED)
NOTE 11 – FAIR VALUE
MEASUREMENTS
Fair value
is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. To measure fair value, a hierarchy has been established which requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and
liabilities as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable
inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other
observable inputs that can be corroborated by observable market data; and Level 3 – Unobservable inputs supported by little
or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies,
or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment
or estimation.
The Company
uses fair value to measure the value of the banker’s acceptance notes it holds at March 31, 2020 and December 31, 2019. The
banker’s acceptance notes are recorded at cost which approximates fair value. The Company held the following
assets and liabilities recorded at fair value:
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
March 31,
|
|
|
Reporting Date Using
|
|
Description
|
|
2020
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Banker’s acceptance notes
|
|
$
|
48,096
|
|
|
$
|
-
|
|
|
$
|
48,096
|
|
|
$
|
-
|
|
Total
|
|
$
|
48,096
|
|
|
$
|
-
|
|
|
$
|
48,096
|
|
|
$
|
-
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
December 31,
|
|
|
Reporting Date Using
|
|
Description
|
|
2019
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Banker’s acceptance notes
|
|
$
|
45,756
|
|
|
$
|
-
|
|
|
$
|
45,756
|
|
|
$
|
-
|
|
Total
|
|
$
|
45,756
|
|
|
$
|
-
|
|
|
$
|
45,756
|
|
|
$
|
-
|
|
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.
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. 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 March 31, 2020, there were 175,000 shares of restricted stock granted and outstanding under the Plan. No options
were outstanding as of March 31, 2020 under the Plan.
There were no securities issued from the Plan during each of
the three months ended March 31, 2020 and 2019.
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, 2020 and 2019.
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, 2020, 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
THREE MONTHS ENDED MARCH 31, 2020 AND
2019 (UNAUDITED)
NOTE 13 – RISKS & UNCERTAINTIES
Current vulnerability due to certain
concentrations
For the year ended March 31, 2020, no customer
accounted for more than 10% of sales and one customer accounted for 10.6% of accounts receivable. Two suppliers accounted for 45.2%
and 18.8% of raw material purchases, and three different products accounted for 35.8%, 29.0% and 14.4% of revenue.
For the three months ended March 31, 2019, no customer accounted
for more than 10% of sales and two customers accounted for 49.3% and 10.6% of accounts receivable. Three suppliers accounted
for 26.7%, 20.6% and 11.0% of the Company’s raw material purchases, and three different products accounted for 35.0%, 24.5%
and 17.0% of revenue.
Nature of Operations
Impact from the New Coronavirus Global
Pandemic (“COVID-19”) - The current outbreak of COVID-19 had a material and adverse effect on the Company’s
business operations. These included, but are not limited to, disruptions or restrictions on its ability to travel or to distribute
its products, as well as temporary closures of its facilities or the facilities of the suppliers or customers. Any disruption or
delay of the Company’s suppliers or customers would likely impact its sales and operating results. In addition, COVID-19
has resulted in a widespread health crisis that could adversely affect the economies and financial markets of China and many other
countries, resulting in an economic downturn that could significantly impact 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.
NOTE 14 – SUBSEQUENT EVENTS
In April 2020, the Company obtained a line
of credit from Postal Savings Bank of China for an aggregate amount of RMB 10,000,000 (approximately $1.4 million), of which RMB
5,000,000 (approximately $0.7 million) have been advanced. 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 in Note 8. In addition, the Company’s Chief Executive Officer and Chair of the Board personally guaranteed
the new line of credit. The Company has an additional RMB 5,000,000 (approximately $0.7 million) available under the line, subject
to a risk review and approval by the third party guarantee company.