China Pharma (CPHI) - 2019 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, with notes detailing financial position, performance, and accounting policies Condensed Consolidated Balance Sheets Total assets decreased from $45.38 million to $43.03 million, driven by reductions in current assets and property, plant, and equipment, while total liabilities and stockholders' equity also decreased Condensed Consolidated Balance Sheets | ASSETS / LIABILITIES & EQUITY | June 30, 2019 ($) | December 31, 2018 ($) | Change ($) | % Change | |:------------------------------|------------------:|--------------------:|-----------:|---------:| | ASSETS | | | | | | Cash and cash equivalents | 1,655,892 | 1,186,587 | 469,305 | 39.55% | | Restricted cash | 503,312 | 1,273,940 | (770,628) | -60.49% | | Trade accounts receivable, net| 680,136 | 916,931 | (236,795) | -25.82% | | Inventory | 4,392,426 | 5,054,975 | (662,549) | -13.11% | | Total Current Assets | 7,687,869 | 8,746,916 | (1,059,047)| -12.11% | | Property, plant and equipment, net | 17,857,438 | 19,294,379 | (1,436,941)| -7.45% | | TOTAL ASSETS | 43,030,370 | 45,377,325 | (2,346,955)| -5.17% | | LIABILITIES | | | | | | Total Current Liabilities | 8,983,497 | 10,051,456 | (1,067,959)| -10.62% | | Total Liabilities | 14,062,728 | 15,178,550 | (1,115,822)| -7.35% | | STOCKHOLDERS' EQUITY | | | | | | Total Stockholders' Equity | 28,967,642 | 30,198,775 | (1,231,133)| -4.08% | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | 43,030,370 | 45,377,325 | (2,346,955)| -5.17% | Condensed Consolidated Statements of Operations and Comprehensive Loss Revenue decreased by 19.0% for both three and six-month periods, with gross profit margin significantly declining, resulting in a net loss of $0.84 million for the three months and $1.26 million for the six months Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) | Metric | Three Months Ended June 30, 2019 ($) | Three Months Ended June 30, 2018 ($) | Six Months Ended June 30, 2019 ($) | Six Months Ended June 30, 2018 ($) | |:-------|-------------------------------------:|-------------------------------------:|-----------------------------------:|-----------------------------------:| | Revenue | 2,569,408 | 3,173,711 | 5,498,681 | 6,789,395 | | Cost of revenue | 2,405,860 | 2,594,230 | 4,678,603 | 5,156,214 | | Gross profit | 163,548 | 579,481 | 820,078 | 1,633,181 | | Total operating expenses | 916,516 | 1,443,884 | 1,907,254 | 2,638,271 | | Loss from operations | (752,968) | (864,403) | (1,087,176) | (1,005,090) | | Net loss | (838,103) | (1,008,049) | (1,255,834) | (1,301,529) | | Basic and diluted loss per share | (0.02) | (0.02) | (0.03) | (0.03) | - Revenue decreased by 19.0% for both three and six-month periods, primarily due to strict policies controlling hospital medicine spending[103][125] - Gross profit margin significantly declined from 18.3% to 6.4% for the three months and from 24.1% to 14.9% for the six months, mainly due to decreased revenue and stable fixed costs[111][133] Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased from $30.20 million to $28.97 million, primarily due to net loss and a negative foreign currency translation adjustment Changes in Stockholders' Equity (Unaudited) | Metric | Balance, January 1, 2019 ($) | Net Loss (3 months ended March 31, 2019) ($) | FX Translation Adj. (3 months ended March 31, 2019) ($) | Balance, March 31, 2019 ($) | Net Loss (3 months ended June 30, 2019) ($) | FX Translation Adj. (3 months ended June 30, 2019) ($) | Balance, June 30, 2019 ($) | |:-------|-----------------------------:|---------------------------------------------:|--------------------------------------------------------:|----------------------------:|--------------------------------------------:|-------------------------------------------------------:|---------------------------:| | Common Stock Amount | 43,580 | - | - | 43,580 | - | - | 43,580 | | Additional Paid-in Capital | 23,590,204 | - | - | 23,590,204 | - | - | 23,590,204 | | Accumulated Deficit | (5,270,358) | (417,731) | - | (5,688,089) | (838,103) | - | (6,526,192) | | Accumulated Other Comprehensive Income | 11,835,349 | - | 835,865 | 12,671,214 | - | (811,164) | 11,860,050 | | Total Stockholders' Equity | 30,198,775 | (417,731) | 835,865 | 30,616,909 | (838,103) | (811,164) | 28,967,642 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $0.93 million, while cash used in investing and financing activities also rose, resulting in a net increase of $0.47 million in cash and cash equivalents Consolidated Statements of Cash Flows (Unaudited) | Cash Flow Activity | Six Months Ended June 30, 2019 ($) | Six Months Ended June 30, 2018 ($) | |:-------------------|-----------------------------------:|-----------------------------------:| | Net Cash Provided by Operating Activities | 931,800 | 124,399 | | Net Cash Used in Investing Activities | (73,538) | (29,982) | | Net Cash Used in Financing Activities | (378,727) | (157,071) | | Effect of Exchange Rate Changes on Cash | (10,230) | (32,033) | | Net (Decrease) Increase in Cash and Cash Equivalents | 469,305 | (94,687) | | Cash and Cash Equivalents at Beginning of Period | 1,186,587 | 2,030,214 | | Cash and Cash Equivalents at End of Period | 1,655,892 | 1,935,527 | - Net cash provided by operating activities significantly increased to $931,800 for the six months ended June 30, 2019, compared to $124,399 in the prior year[13][147] Notes to Condensed Consolidated Financial Statements These notes detail the company's financial health, including a going concern warning, significant accounting policies, and specifics on assets, liabilities, equity, and subsequent events - The company's accumulated deficit of $6.5 million and anticipated operating losses raise substantial doubt about its ability to continue as a going concern[15] - Management plans to enhance sales, strengthen accounts receivable collection, explore strategic alternatives, and use fixed assets as collateral for additional loans to address going concern issues[15] - The company adopted ASU No. 2016-02, Leases, effective January 1, 2019, recognizing right-of-use assets and lease liabilities with no material impact on operating results or cash flows[42] NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's organizational structure, its PRC operating subsidiary, and significant accounting policies covering liquidity, consolidation, estimates, assets, revenue, expenses, and recent pronouncements - The Chairperson, CEO, and Interim CFO advanced $693,848 to the company in July 2019 for working capital and a $2.0 million construction loan payment, indicating reliance on related party liquidity support[15] - The company's primary operating subsidiary, Hainan Helpson Medical & Biotechnology Co., Ltd (Helpson), manufactures and markets generic and branded pharmaceutical products in the PRC[19][22] - The company adopted ASU No. 2016-02, Leases, effective January 1, 2019, recognizing $236,055 in right-of-use assets and related lease obligations with no material impact on operating results or cash flows[42] NOTE 2 – INVENTORY Inventory decreased from $5.05 million to $4.39 million, with reductions across raw materials, work in process, and finished goods Inventory Composition | Inventory Type | June 30, 2019 ($) | December 31, 2018 ($) | |:---------------|------------------:|--------------------:| | Raw materials | 2,744,150 | 3,148,990 | | Work in process| 427,778 | 493,768 | | Finished goods | 1,220,498 | 1,412,217 | | Total Inventory| 4,392,426 | 5,054,975 | NOTE 3 – PROPERTY, PLANT AND EQUIPMENT Net property, plant and equipment decreased to $17.86 million from $19.29 million, primarily due to accumulated depreciation, with depreciation expense of $1.54 million for the six months Property, Plant and Equipment, Net | Asset Category | June 30, 2019 ($) | December 31, 2018 ($) | |:---------------|------------------:|--------------------:| | Total Gross | 37,090,868 | 37,008,952 | | Less: Accumulated depreciation | (19,233,430) | (17,714,573) | | Net PPE | 17,857,438 | 19,294,379 | - Depreciation expense for the six months ended June 30, 2019, was $1,535,336, a decrease from $1,647,471 in the prior year[52] NOTE 4 - INTANGIBLE ASSETS Intangible assets, primarily CFDA approved medical formulas, decreased to $0.23 million net from $0.27 million due to amortization, with an expense of $40,534 for the six months Intangible Assets, Net | Metric | June 30, 2019 ($) | December 31, 2018 ($) | |:-------|------------------:|--------------------:| | Gross carrying amount | 4,910,563 | 4,909,318 | | Accumulated amortization | (4,684,033) | (4,642,875) | | Net carrying amount | 226,530 | 266,443 | - Amortization expense for intangible assets was $40,534 for the six months ended June 30, 2019, a decrease from $66,857 in the prior year[55] NOTE 5 – ADVANCES FOR PURCHASES OF INTANGIBLE ASSETS The company has made advances for medical formulas awaiting CFDA production approval, facing increased uncertainties and extended timelines due to new regulations and policy changes in China's pharmaceutical industry - Significant changes in China's pharmaceutical policies and regulations are increasing uncertainties and extending timelines for CFDA production approvals for pipeline products[60][61] - Contracts for medical formulas include a refund right if CFDA approval is not obtained or if the laboratory breaches the contract[62][63] - As of June 30, 2019, the company was obligated to pay approximately $0.3 million upon completion of various phases to obtain CFDA production approval for medical formulas[64] NOTE 6 – RELATED PARTY TRANSACTIONS The company has outstanding payables to related parties, including advances from a board member and the Chairperson, with $231,252 repaid and an additional $693,848 loan received from the Chairperson in July 2019 - A board member advanced $1,354,567 to the company as of June 30, 2019, bearing 1.0% annual interest[65] - The Chairperson, CEO, and Interim CFO provided advances totaling $48,000 as of June 30, 2019, with $231,252 repaid in the six months ended June 30, 2019[66] - In July 2019, the Chairperson provided an additional loan of $693,848 to the company, bearing 4.35% annual interest and payable within one year[66][90] NOTE 7 – BANKER'S ACCEPTANCE NOTES PAYABLE Outstanding banker's acceptance notes decreased to $503,312 from $1,273,940, with an equal amount of restricted cash deposited to satisfy these obligations Banker's Acceptance Notes Payable | Metric | June 30, 2019 ($) | December 31, 2018 ($) | |:-------|------------------:|--------------------:| | Outstanding notes | 503,312 | 1,273,940 | | Restricted cash | 503,312 | 1,273,940 | NOTE 8 – CONSTRUCTION LOAN FACILITY The company has an RMB 80 million construction loan facility, with $148,227 in principal payments made and an additional RMB 14 million (approximately $2.2 million) paid in July 2019, with remaining payments scheduled through 2021 - The company has an RMB 80 million (approximately $13 million) construction loan facility, collateralized by its new production facility[68] - Principal payments of $148,227 were made during the six months ended June 30, 2019, and an additional RMB 14 million (approximately $2.2 million) payment was made in July 2019[68] Construction Loan Facility Principal Payments as of June 30, 2019 | Year | Amount ($) | |:-----|-----------:| | 2019 | 2,181,913 | | 2020 | 2,181,913 | | 2021 | 2,036,453 | | Total| 6,400,279 | NOTE 9 - LEASES Operating lease costs for office and production facilities were $46,454 for the six months, with operating lease right-of-use assets of $184,618 and liabilities of $186,780 as of June 30, 2019 - Operating lease cost for the six months ended June 30, 2019, was $46,454[71] Operating Lease Liabilities as of June 30, 2019 | Metric | Amount ($) | |:-------|-----------:| | Operating lease right of use assets | 184,618 | | Operating lease liabilities | 186,780 | | Weighted average remaining lease term | 2.02 years | | Weighted average discount rate | 4.75% | NOTE 10 - INCOME TAXES The PRC subsidiary is subject to a 25% enterprise income tax rate, with no income tax expense for the six months, and a $27.30 million valuation allowance against deferred tax assets due to uncertainty of realizing significant net operating loss carryforwards - The company's PRC subsidiary is subject to an enterprise income tax rate of 25%[75] - As of June 30, 2019, the company had PRC net operating loss carryforwards of approximately $53.4 million and U.S. federal NOLs of approximately $5.8 million[75] - A valuation allowance of $27,295,714 was provided against deferred tax assets as of June 30, 2019, due to uncertainty of realizing all benefits[77] NOTE 11 – FAIR VALUE MEASUREMENTS The company measures banker's acceptance notes at cost approximating fair value, with $20,579 classified under Level 2 of the fair value hierarchy as of December 31, 2018 Fair Value Measurements at December 31, 2018 | Description | Total ($) | Level 1 ($) | Level 2 ($) | Level 3 ($) | |:------------|----------:|------------:|------------:|------------:| | Banker's acceptance notes | 20,579 | - | 20,579 | - | NOTE 12 - STOCKHOLDERS' EQUITY The company is authorized to issue 95 million common and 5 million preferred shares, with 43,579,557 common shares outstanding and 175,000 restricted shares under the 2010 Incentive Plan - The company has 95 million authorized common shares and 5 million authorized preferred shares, with 43,579,557 common shares outstanding as of August 12, 2019[5][81] - Under the 2010 Incentive Plan, 175,000 shares of restricted stock were granted and outstanding as of June 30, 2019, with no options outstanding[82] NOTE 13 – COMMITMENTS AND CONTINGENCIES Operations in the PRC expose the company to significant political, economic, legal, and foreign currency risks, with RMB revenue conversion and remittance requiring PRC government approval - The company's operations in the PRC expose it to risks from political, economic, legal environments, and foreign currency exchange rate fluctuations[87] - Conversion of RMB into foreign currencies and remittance abroad require PRC government approval[88] NOTE 14 – CONCENTRATIONS Two customers accounted for 49.7% and 10.7% of accounts receivable, and two suppliers for 27.7% and 24.7% of raw material purchases, indicating significant concentration - For the six months ended June 30, 2019, two customers accounted for 49.7% and 10.7% of accounts receivable[89] - For the six months ended June 30, 2019, two suppliers accounted for 27.7% and 24.7% of raw material purchases[89] NOTE 15 – SUBSEQUENT EVENTS On July 8, 2019, the company entered a loan agreement for $693,848 with its Chairperson, CEO, and Interim CFO, bearing 4.35% annual interest and payable within one year - On July 8, 2019, the company secured a loan of $693,848 from its Chairperson, CEO, and Interim CFO, with a 4.35% annual interest rate, due within one year[90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and operations, highlighting regulatory challenges, market trends, detailed financial performance, liquidity, capital resources, and critical accounting policies - The company faces sustained pressure from heightened drug registration standards, consistency evaluations, rising clinical trial costs, and increased environmental protection costs in China[94] - The 'Healthy China 2030 Plan' aims to reduce personal hygiene spending to 28% by 2020 and 25% by 2030, promoting generic drugs as a cost-effective solution[100][101] - Management believes cash from operations will be sufficient for working capital and capital expenditures for the next 12 months, but acknowledges potential need for additional financing if plans deviate[146] Business Overview & Recent Developments The company faces pressure from stricter drug registration standards, consistency evaluations, and rising costs, with new CFDA regulations causing delays and termination of pipeline products - The company faces sustained pressure from heightened drug registration standards, consistency evaluations, rising clinical trial costs, and increased environmental protection costs[94] - New CFDA regulations and consistency evaluations have led to delays in product approvals, increased costs, and the termination of certain pipeline products[95][96] Market Trends China's pharmaceutical industry is growing steadily, driven by rising healthcare costs, improved insurance, and an aging population, with government policies promoting generic drugs for a large domestic and potential export market - China's national budget for health care increased by RMB 84 billion (2.5%) in 2018, accounting for 7.3% of national financial expenditure[98] - The 'Healthy China 2030 Plan' aims to reduce personal hygiene spending to approximately 28% of total healthcare expenditures by 2020 and 25% by 2030[100] - The promotion of generic drugs as a cost-effective medical solution is expected to increase, offering a huge domestic market and potential for export to overseas markets[101] Results of Operations for the Three Months Ended June 30, 2019 Revenue decreased by 19.0% to $2.6 million due to policy impacts, gross profit margin fell to 6.4%, and despite reduced selling and bad debt expenses, R&D increased, resulting in a net loss of $0.8 million Revenue Revenue decreased by 19.0% to $2.6 million, mainly due to policies controlling hospital medicine spending, with 'Other' and 'Digestive Diseases' categories experiencing the largest declines - Revenue decreased by 19.0% to $2.6 million for the three months ended June 30, 2019, from $3.2 million in the prior year, mainly due to policies controlling hospital medicine spending[103] Revenue by Product Category (Three Months Ended June 30) | Product Category | 2019 ($M) | 2018 ($M) | Net Change ($M) | % Change | |:-----------------|----------:|----------:|----------------:|---------:| | CNS Cerebral & Cardio Vascular | 0.62 | 0.74 | -0.12 | -16% | | Anti-Viral/ Infection & Respiratory | 1.46 | 1.47 | -0.01 | -1% | | Digestive Diseases | 0.12 | 0.25 | -0.13 | -52% | | Other | 0.40 | 0.72 | -0.32 | -44% | - The 'Anti-Viral/Infection & Respiratory' category increased its share of total sales from 46% to 56% year-over-year, while 'Other' decreased from 23% to 15%[108] Cost of Revenue Cost of revenue decreased to $2.4 million from $2.6 million due to decreased sales, but increased as a percentage of total revenue from 82% to 94% due to stable fixed costs - Cost of revenue decreased to $2.4 million (94% of total revenue) for the three months ended June 30, 2019, from $2.6 million (82% of total revenue) in 2018[110] - The increase in cost of revenue as a percentage of total revenue was mainly due to the stable nature of fixed costs despite decreased sales[110] Gross Profit and Gross Margin Gross profit decreased to $0.2 million from $0.6 million, with gross profit margin declining from 18.3% to 6.4%, primarily due to decreased revenue and a higher fixed cost ratio - Gross profit decreased to $0.2 million for the three months ended June 30, 2019, from $0.6 million in 2018[111] - Gross profit margin declined from 18.3% to 6.4% for the three months ended June 30, 2019, mainly due to decreased revenue and a higher fixed cost ratio[111] Selling Expenses Selling expenses decreased to $0.5 million from $0.7 million, and as a percentage of total revenue, decreased from 22.6% to 19.7%, reflecting adjustments in sales practices and healthcare policies - Selling expenses decreased to $0.5 million for the three months ended June 30, 2019, from $0.7 million in 2018[112] - Selling expenses as a percentage of total revenue decreased from 22.6% to 19.7%, driven by adjustments in sales practices and healthcare policies[112] General and Administrative Expenses General and administrative expenses decreased to $0.3 million from $0.4 million, but increased as a percentage of total revenues from 11.1% to 13.0% - General and administrative expenses decreased to $0.3 million for the three months ended June 30, 2019, from $0.4 million in 2018[113] - General and administrative expenses as a percentage of total revenues increased from 11.1% to 13.0% for the three months ended June 30, 2019[113] Research and Development Expenses Research and development expenses increased to $0.07 million from $0.02 million, attributed to consistency evaluations significantly impacting generic products and pipeline development - Research and development expenses increased to $0.07 million for the three months ended June 30, 2019, from $0.02 million in 2018[114] - The increase in R&D expenses is due to consistency evaluations, which are expected to significantly impact generic products and pipeline development[114] Bad Debt Expenses Bad debt expenses significantly decreased to $10,092 from $350,847, following an updated policy in Q4 2018 extending credit terms to 180 days, reflecting longer receivable aging in the Chinese pharmaceutical market - Bad debt expenses decreased significantly to $10,092 for the three months ended June 30, 2019, from $350,847 in 2018[115] - The company updated its bad debt allowance policy in Q4 2018, extending credit terms from 90 to 180 days, reflecting longer receivable aging in the Chinese pharmaceutical market[116][117] Accounts Receivable Aging Distribution (Percentage of Total) | Aging Period | June 30, 2019 | December 31, 2018 | |:-------------|--------------:|------------------:| | 1 - 180 Days | 2.9% | 3.8% | | 180 - 360 Days | 0.7% | 1.2% | | 360 - 720 Days | 0.5% | 0.3% | | > 720 Days | 95.9% | 94.7% | Loss from Operations Operating loss for the three months ended June 30, 2019, was $0.8 million, an improvement from $0.9 million in the prior year - Loss from operations for the three months ended June 30, 2019, was $752,968, an improvement from $864,403 in the prior year[10] Net Interest Expense Net interest expense for the three months ended June 30, 2019, was $0.09 million, a decrease from $0.12 million in the prior year - Net interest expense for the three months ended June 30, 2019, was $85,135, a decrease from $121,056 in the prior year[10] Income Tax expense The company reported no income tax expense for the three months ended June 30, 2019, compared to $0.02 million in the prior year, with its subsidiary's tax rate remaining at 25% - No income tax expense was reported for the three months ended June 30, 2019, compared to $22,590 in the prior year[10][121] Net Loss Net loss for the three months ended June 30, 2019, was $0.8 million, an improvement from $1.0 million due to expenditure controls offsetting revenue decrease, with basic and diluted loss per share remaining at $0.02 - Net loss for the three months ended June 30, 2019, was $838,103, an improvement from $1,008,049 in the prior year, due to expenditure controls[10][123] - Basic and diluted loss per share remained at $0.02 for both periods, with 43,579,557 weighted average shares outstanding[10][124] Results of Operations for the Six Months Ended June 30, 2019 Revenue decreased by 19.0% to $5.5 million due to government policies, gross profit margin declined to 14.9%, and despite decreased selling, G&A, and bad debt expenses, R&D increased, resulting in a consistent net loss of $1.3 million Revenue Revenue decreased by 19.0% to $5.5 million due to government policies, with 'Anti-Viral/Infection & Respiratory' (mainly Cefaclor sales), 'Digestive Diseases', and 'Other' categories experiencing significant declines - Revenue decreased by 19.0% to $5.5 million for the six months ended June 30, 2019, from $6.8 million in the prior year, due to government policies on medicine spending[125] Revenue by Product Category (Six Months Ended June 30) | Product Category | 2019 ($M) | 2018 ($M) | Net Change ($M) | % Change | |:-----------------|----------:|----------:|----------------:|---------:| | CNS Cerebral & Cardio Vascular | 1.07 | 1.25 | -0.18 | -14% | | Anti-Viral/ Infection & Respiratory | 3.32 | 3.81 | -0.49 | -13% | | Digestive Diseases | 0.23 | 0.42 | -0.19 | -45% | | Other | 0.90 | 1.31 | -0.41 | -31% | - The 'Anti-Viral/Infection & Respiratory' category increased its share of total sales from 56% to 60% year-over-year, while 'Digestive Diseases' and 'Other' categories decreased their shares[130] Cost of Revenue Cost of revenue decreased to $4.7 million from $5.2 million due to decreased sales, but increased as a percentage of total revenue from 76% to 85% due to stable fixed costs - Cost of revenue decreased to $4.7 million (85% of total revenue) for the six months ended June 30, 2019, from $5.2 million (76% of total revenue) in 2018[131] - The percentage of cost to revenue increased due to the stable nature of fixed costs, which deteriorated the gross margin when revenue decreased[131] Gross Profit and Gross Margin Gross profit decreased to $0.8 million from $1.6 million, with gross profit margin declining from 24.1% to 14.9%, primarily due to decreased sales and stable fixed costs - Gross profit decreased to $0.8 million for the six months ended June 30, 2019, from $1.6 million in 2018[133] - Gross profit margin declined from 24.1% to 14.9% for the six months ended June 30, 2019, due to decreased sales and the impact of stable fixed costs[133] Selling Expenses Selling expenses decreased to $1.0 million from $1.4 million, and as a percentage of total revenue, decreased from 20.5% to 17.9% - Selling expenses decreased to $1.0 million for the six months ended June 30, 2019, from $1.4 million in 2018[134] - Selling expenses as a percentage of total revenue decreased from 20.5% to 17.9% for the six months ended June 30, 2019[134] General and Administrative Expenses General and administrative expenses decreased to $0.76 million from $0.85 million, but increased as a percentage of total revenues from 12.4% to 13.9% - General and administrative expenses decreased to $0.76 million for the six months ended June 30, 2019, from $0.85 million in 2018[135] - General and administrative expenses as a percentage of total revenues increased from 12.4% to 13.9% for the six months ended June 30, 2019[135] Research and Development Expenses Research and development expenses increased to $0.14 million from $0.05 million, primarily due to consistency evaluations for existing products, with no further pipeline product development due to policy changes - Research and development expenses increased to $0.14 million for the six months ended June 30, 2019, from $0.05 million in 2018, an increase of $0.09 million[136] - The increase in R&D expenses was mainly due to spending on consistency evaluations for current existing products, while pipeline products saw no further development due to policy changes[136] Bad Debt Expenses Bad debt expenses decreased to $0.02 million from $0.35 million, primarily due to improved collection of accounts receivable - Bad debt expenses decreased to $0.02 million for the six months ended June 30, 2019, from $0.35 million in 2018, a decrease of $0.33 million[137] - The decrease in bad debt expenses was mainly due to improved collection of accounts receivable in the first half of 2019[137] Loss from Operations Operating loss for the six months ended June 30, 2019, was $1.1 million, an increase from $1.0 million in the prior year - Loss from operations for the six months ended June 30, 2019, was $1.1 million, compared to $1.0 million in the prior year[139] Net Interest Expense Net interest expense for the six months ended June 30, 2019, was $0.17 million, a decrease from $0.25 million in the prior year - Net interest expense for the six months ended June 30, 2019, was $0.17 million, a decrease from $0.25 million in 2018[140] Income Tax expense The company reported no income tax expense for the six months ended June 30, 2019, compared to $0.05 million in the prior year, with its subsidiary's tax rate remaining at 25% - No income tax expense was reported for the six months ended June 30, 2019, compared to $0.05 million in the prior year[141] Net Loss Net loss for the six months ended June 30, 2019, was $1.3 million, consistent with the prior year, as decreased revenue was offset by decreased expenses, with basic and diluted loss per share remaining at $0.03 - Net loss for the six months ended June 30, 2019, was $1.3 million, consistent with the prior year, reflecting an offset of decreased revenue by decreased expenses[142] - Basic and diluted loss per share remained at $0.03 for both periods, with 43,579,557 weighted average shares outstanding[144] Liquidity and Capital Resources Cash and cash equivalents increased to $1.7 million, with cash from operations as the principal liquidity source, believed sufficient for 12 months, though additional financing may be sought, and significant restrictions exist on fund transfers from the PRC subsidiary - Cash and cash equivalents increased to $1.7 million (3.8% of total assets) at June 30, 2019, from $1.2 million (2.6% of total assets) at December 31, 2018[145] - All $1.7 million of cash and cash equivalents are considered reinvested indefinitely in the Chinese subsidiary, Helpson, and are not expected to be available for dividends or other payments to the parent company[145] - PRC regulations require Helpson to allocate at least 10% of after-tax net income to statutory surplus reserve accounts, restricting dividend distribution to overseas shareholders[149] Operating Activities Net cash provided by operating activities significantly increased to $0.9 million from $0.1 million, with net accounts receivable decreasing to $0.7 million and total inventory to $4.4 million - Net cash provided by operating activities was $0.9 million for the six months ended June 30, 2019, compared to $0.1 million in 2018[147] - Net accounts receivable decreased to $0.7 million at June 30, 2019, from $0.9 million at December 31, 2018[147] - Total inventory decreased to $4.4 million at June 30, 2019, from $5.1 million at December 31, 2018[147] Investing Activities Net cash used in investing activities increased to $0.07 million for the six months ended June 30, 2019, compared to $0.03 million in the prior year - Net cash used in investing activities was $0.07 million for the six months ended June 30, 2019, compared to $0.03 million in 2018[147] Financing Activities Cash flow used in financing activities increased to $0.4 million from $0.2 million, primarily due to payments to related party payables and scheduled construction loan facility payments - Cash flow used in financing activities was $0.4 million for the six months ended June 30, 2019, compared to $0.2 million in 2018[148] - Financing activities included payments to related party payables and scheduled payments of the construction loan facility[148] Off-Balance Sheet Arrangements As of June 30, 2019, the company did not have any off-balance sheet arrangements - The company did not have any off-balance sheet arrangements as of June 30, 2019[151] Commitments As of June 30, 2019, the company was obligated to pay approximately $0.30 million to laboratories and service providers for CFDA production approval of medical formulas - As of June 30, 2019, the company had commitments of approximately $0.30 million to laboratories and service providers for CFDA production approval of medical formulas[151] Critical Accounting Policies Management's discussion and analysis are based on U.S. GAAP consolidated financial statements, requiring significant estimates and judgments, with critical accounting policies detailed in Note 1 - Critical accounting policies are discussed in Note 1 to the consolidated financial statements, 'Organization and Significant Accounting Policies'[152] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a 'smaller reporting company,' the registrant is exempt from providing quantitative and qualitative disclosures about market risk - The company is a 'smaller reporting company' and is not required to provide quantitative and qualitative disclosures about market risk[154] Item 4. Controls and Procedures The CEO and interim CFO concluded that disclosure controls and procedures were not effective due to a material weakness in U.S. GAAP knowledgeable personnel, though management asserts financial statements are fairly stated - The company's disclosure controls and procedures were deemed not effective as of June 30, 2019[156] - The ineffectiveness is attributed to a material weakness in internal control over financial reporting, specifically a lack of U.S. GAAP knowledgeable accounting personnel[156] - Despite the material weakness, management concluded that the consolidated financial statements are fairly stated in all material respects in accordance with U.S. GAAP[156] Evaluation of Disclosure Controls and Procedures The CEO and interim CFO concluded that disclosure controls and procedures were not effective due to a material weakness: lack of U.S. GAAP knowledgeable accounting personnel - Disclosure controls and procedures were not effective as of June 30, 2019, due to a material weakness: lack of accounting financial reporting personnel knowledgeable in U.S. GAAP[156] Changes in Internal Controls over Financial Reporting No material changes in internal control over financial reporting occurred during the last fiscal quarter - No material changes in internal control over financial reporting occurred during the last fiscal quarter[157] PART II OTHER INFORMATION Item 6. Exhibits This section lists exhibits filed as part of the Form 10-Q, including a loan agreement with the Chairperson, officer certifications, and XBRL taxonomy documents - Exhibits include a loan agreement with Zhilin Li (Chairperson, CEO, Interim CFO), certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL instance and taxonomy documents[161]