China Pharma (CPHI) - 2019 Q4 - Annual Report

PART I Business China Pharma Holdings develops and markets pharmaceuticals in the PRC, adapting to market reforms and expanding distribution - The company is principally engaged in the development, manufacture, and marketing of pharmaceutical products in the PRC, including dry powder injectables, liquid injectables, tablets, and capsules[11] - As of December 31, 2019, the company manufactured 19 pharmaceutical products, categorized as basic generics, first-to-market generics, and Modern Traditional Chinese Medicines, plus one comprehensive healthcare product[12][14] - The company's strategy includes promoting existing brands, advancing consistency evaluations for its products to comply with GPO requirements, exploring the comprehensive health products market, and expanding its distribution network[45][46][47][48] Revenue by Product Category (in millions USD) | Product Category | 2019 | 2018 | Net Change | % Change | | :--- | :--- | :--- | :--- | :--- | | CNS Cerebral & Cardio Vascular | $2.35 | $2.41 | -$0.05 | -2% | | Anti-Viral/ Infection & Respiratory | $6.33 | $6.76 | -$0.43 | -6% | | Digestive Diseases | $0.46 | $0.72 | -$0.26 | -36% | | Other | $1.86 | $2.44 | -$0.58 | -24% | - The company relies on numerous suppliers, with the top three accounting for 22.3%, 20.6%, and 5.8% of raw material purchases in 2019[66] - The company's intellectual property includes two patents (expiring in 2025 and 2029) and 17 registered trademarks[77][78] Risk Factors The company faces significant business, operational, and stock risks, including intense competition, regulatory non-compliance, and going concern doubts - The company's auditors have raised substantial doubt about its ability to continue as a going concern due to recurring losses, net current liabilities, and an accumulated deficit[236] - A material weakness in internal control over financial reporting has been identified, specifically a lack of accounting personnel knowledgeable in U.S. GAAP[233][317] - The business is highly dependent on the PRC market, making it vulnerable to changes in Chinese economic policies, healthcare reforms (like GPO), currency exchange controls, and legal system uncertainties[174][175][194] - The company faces intense competition from other pharmaceutical manufacturers, and most of its products are off-patent branded generics, which increases competitive pressure[115][120] - The company relies exclusively on over 1,000 distributors in the PRC for all its revenues, and the top five distributors accounted for 14% of net revenues in 2019[143][144] - The company's common stock is subject to "penny stock" regulations, which can impose additional sales practice requirements on broker-dealers and may affect liquidity[226][227] Unresolved Staff Comments As a smaller reporting company, China Pharma Holdings, Inc. is not required to provide information for this item - The company, being a smaller reporting company, is not required to provide information regarding unresolved staff comments[241] Properties The company owns two production facilities in Haikou, PRC, with land use rights until 2063, and a new facility collateralizes an RMB 80 million loan - The company owns two production facilities in Haikou, Hainan Province, PRC, with a total production area of over 27,000 square meters[243] - The company holds land use rights for approximately 22,936 square meters of land in the Haikou Bonded Zone, expiring on September 10, 2063[242] - An eight-year construction loan facility of RMB 80 million is collateralized by the company's new factory and its production line equipment[247][248] Legal Proceedings The company is not currently aware of any material legal proceedings or claims affecting its business or financial condition - The company is not currently involved in any material legal proceedings[249] Mine Safety Disclosures This item is not applicable to the company - Mine safety disclosures are not applicable to the company's operations[250] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CPHI common stock trades on NYSE MKT, has never paid dividends, and has 3.825 million securities available for future issuance - The company's common stock trades on the NYSE MKT under the symbol "CPHI"[253] - The company has never paid cash dividends and does not plan to in the foreseeable future[255] - As of the report date, there were 3,825,000 securities remaining available for future issuance under the company's equity compensation plans[256] Selected Financial Data As a smaller reporting company, China Pharma Holdings, Inc. is not required to provide selected financial data - The company is not required to provide selected financial data as it qualifies as a "smaller reporting company"[257] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue decreased 11.4% to $11.0 million in 2019, resulting in a $20.7 million net loss primarily from a $17.02 million impairment, raising going concern doubts Fiscal Year 2019 vs 2018 Performance | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | $11.0 million | $12.3 million | | Gross Profit | $1.5 million | $2.0 million | | Gross Margin | 13.6% | 16.0% | | Impairment Loss | $17.02 million | $6.48 million | | Operating Loss | ($20.4 million) | ($10.4 million) | | Net Loss | ($20.7 million) | ($10.8 million) | | Loss per Share | ($0.48) | ($0.25) | - The 11.4% decrease in revenue was mainly attributed to the impact of the GPO drug procurement policy and stricter drug pricing controls in China[271] - The company recognized a $17.02 million impairment loss in 2019, primarily related to advances made to laboratories for medical formulas that are now unlikely to generate future cash flow[284] - As of December 31, 2019, cash and cash equivalents were $1.1 million. The company's principal source of liquidity is cash from operations, supplemented by advances from the CEO[297] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, China Pharma Holdings, Inc. is not required to provide market risk disclosures - The company is not required to provide quantitative and qualitative disclosures about market risk as it qualifies as a "smaller reporting company"[307] Financial Statements and Supplementary Data This section references the consolidated financial statements and independent auditor's report, included in the 'F' pages of the annual report - The company's audited consolidated financial statements for the years ended December 31, 2019 and 2018, are included starting on page F-1 of the report[308] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure during the reporting period - The company reported no disagreements with its accountants on accounting and financial disclosure[309] Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in internal control over financial reporting, lacking U.S. GAAP knowledgeable personnel - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019[312] - A material weakness was identified in internal control over financial reporting due to a lack of accounting financial reporting personnel knowledgeable in U.S. GAAP[317] - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[318] Other Information There is no other information to report for this item - The company reported no other information under this item[319] PART III Directors, Executive Officers and Corporate Governance This section details the company's leadership, including Zhilin Li as CEO and interim CFO, independent board members, and the audit committee - Zhilin Li, age 67, serves as the Chairman, President, Chief Executive Officer, and interim Chief Financial Officer[321][323] - The board includes three independent directors: Gene Michael Bennett, Yingwen Zhang, and Baowen Dong[321][354] - The Audit Committee consists of the three independent directors, with Gene Michael Bennett serving as the Chairman and designated "audit committee financial expert"[332] Executive Compensation CEO Zhilin Li's total compensation was $241,600 for 2019 and 2018, while independent directors received $6,000 to $16,000 annually Executive Compensation (2018-2019) | Name and Principal Position | Year | Salary ($) | Total Compensation ($) | | :--- | :--- | :--- | :--- | | Zhilin Li (Chairman, CEO, President, interim CFO) | 2019 | 225,600 | 241,600 | | | 2018 | 225,600 | 241,600 | Director Compensation (2019) | Name | Total Compensation ($) | | :--- | :--- | | Heung Mei Tsui | 16,000 | | Gene Michael Bennett | 16,000 | | Yingwen Zhang | 6,037 | | Baowen Dong | 6,037 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters Common stock ownership is highly concentrated, with CEO Zhilin Li owning 23.1% and Director Heung Mei Tsui 21.4%, giving management significant influence Beneficial Ownership (as of March 20, 2020) | Name | Shares Owned | Percentage of Class | | :--- | :--- | :--- | | Zhilin Li (CEO) | 10,050,000 | 23.1% | | Heung Mei Tsui (Director) | 9,312,651 | 21.4% | | All directors and executive officers as a group (5 persons) | 19,362,651 | 44.5% | Certain Relationships and Related Transactions, and Director Independence The company engaged in related-party transactions, including loans from a director and advances from the CEO, with three independent directors on the board - Director Heung Mei Tsui has provided loans to the company, with an outstanding balance of $1,354,567 as of December 31, 2019. The loans bear 1% annual interest[352] - The company received net advances of $667,440 from its Chairperson and CEO, Zhilin Li, during the fiscal year ended December 31, 2019. A formal loan agreement for RMB 4.77 million ($691,459) was executed with an interest rate of 4.35%[353] - The board of directors has determined that Messrs. Gene Michael Bennett, Baowen Dong, and Yingwen Zhang are "independent directors"[354] Principal Accountant Fees and Services In FY2019, the company incurred $110,000 in audit fees and $6,000 in tax fees from B F Borgers CPA PC, all pre-approved by the Audit Committee Accountant Fees | Fee Type | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Audit Fees | $110,000 | $115,000 | | Tax Fees | $6,000 | $0 | | Audit-Related Fees | $0 | $0 | | All Other Fees | $0 | $0 | PART IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed with the annual report, including corporate governance documents and required certifications - This section provides an index of all financial statements and exhibits filed as part of the report[360][365] Financial Statements Report of Independent Registered Public Accounting Firm The auditor's report confirms fair presentation but includes a 'Going concern uncertainty' paragraph due to recurring losses, net current liabilities, and accumulated deficit - The auditor's report contains a "Going concern uncertainty" paragraph[369] - The going concern issue is raised due to recurring losses from operations, net current liabilities, and an accumulated deficit[369] Consolidated Financial Statements Consolidated financial statements show total assets decreased to $22.2 million, a net loss of $20.7 million due to impairment, and a net decrease in cash from operations Consolidated Balance Sheets (in thousands USD) | | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $1,075 | $1,187 | | Total Current Assets | $5,579 | $8,747 | | Advances for purchases of intangible assets | $0 | $17,070 | | Property, plant and equipment, net | $16,314 | $19,294 | | Total Assets | $22,235 | $45,377 | | Liabilities & Stockholders' Equity | | | | Total Current Liabilities | $10,045 | $10,051 | | Total Liabilities | $12,998 | $15,179 | | Accumulated deficit | ($25,972) | ($5,270) | | Total Stockholders' Equity | $9,238 | $30,199 | Consolidated Statements of Operations (in thousands USD) | | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Revenue | $10,924 | $12,331 | | Gross profit | $1,482 | $1,975 | | Impairment loss | $17,015 | $6,479 | | Loss from operations | ($20,408) | ($10,447) | | Net loss | ($20,702) | ($10,750) | Consolidated Statements of Cash Flows (in thousands USD) | | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $608 | $1,882 | | Net Cash Used in Investing Activities | ($136) | ($51) | | Net Cash Used in Financing Activities | ($1,729) | ($1,976) | | Net Decrease in Cash | ($1,276) | ($279) | Notes to Consolidated Financial Statements Notes provide context on going concern doubts, a $17.0 million impairment loss, related-party transactions, tax carryforwards, concentration risks, and initial COVID-19 impact - Note 1: Management acknowledges that recurring losses, net current liabilities, and an accumulated deficit of $26.0 million raise substantial doubt about the company's ability to continue as a going concern[388] - Note 5: The company recognized an impairment loss of $17,015,117 in 2019 for advances made to laboratories for the purchase of medical formulas, writing off all remaining advances[434] - Note 10: The company has significant net operating loss carryforwards for PRC tax purposes ($50 million) and U.S. tax purposes ($6.2 million), but a full valuation allowance has been provided against these deferred tax assets[450][452] - Note 13: The company has significant concentration risk. For 2019, two customers accounted for 49.6% and 10.7% of accounts receivable[463] - Note 14 (Subsequent Events): The outbreak of COVID-19 in China led to a reduced work resumption rate in February and March 2020, which returned to approximately 90% by March 25, 2020[468]