China Pharma (CPHI) - 2021 Q4 - Annual Report

Part I Item 1. Business China Pharma Holdings, Inc. is a PRC-based pharmaceutical company focused on developing, manufacturing, and marketing 19 pharmaceutical products and healthcare items through GMP-compliant facilities, emphasizing generics, Modern TCMs, and strategic market expansion - The company primarily develops, manufactures, and markets pharmaceutical products for human use in the PRC, with all operations and facilities located domestically[11] - As of December 31, 2021, the company manufactured 19 pharmaceutical products across basic generic, first-to-market generic, and Modern Traditional Chinese Medicine categories[12] - The company operates two GMP-compliant production facilities in Haikou, Hainan Province[14] - The company's strategy includes promoting existing brands, advancing consistency evaluations, exploring consumer healthcare and CDMO services, expanding distribution, and pursuing strategic acquisitions[43][44][45] Industry Background and Market Opportunities The Chinese pharmaceutical manufacturing industry experienced significant growth in 2021, driven by a low COVID-19 base, but faces pressure from medical insurance cost controls and policy trends like volume-based procurement and consistency evaluations favoring innovation - In the first three quarters of 2021, China's pharmaceutical manufacturing industry revenue reached RMB 2,129 billion (approx. US$330 billion), a 24.4% YoY increase, with net income at RMB 452 billion (approx. US$70 billion), an 80.6% YoY increase[18] - The government's volume-based procurement policy resulted in an average drug price reduction of over 50% across six rounds, saving substantial medical insurance funds[22][34] - The 'Consistency Evaluation' for generic drugs is a critical policy requiring generics to match original drug quality and efficacy, mandatory for national centralized procurement participation[26][27] Products The company's portfolio comprises 19 prescription pharmaceuticals across CNS, Anti-infection/Respiratory, and Digestive diseases, with total product revenue reaching $9.64 million in FY2021, a 6% increase from 2020 Revenue by Product Category (in millions USD) | Product Category | 2021 Revenue | 2020 Revenue | Net Change | % Change | | :--- | :--- | :--- | :--- | :--- | | CNS Cerebral & Cardio Vascular | $2.68 | $2.03 | $0.65 | 32% | | Anti-Viral/ Infection & Respiratory | $5.22 | $5.13 | $0.09 | 2% | | Digestive Diseases | $0.37 | $0.40 | -$0.02 | -6% | | Other | $1.37 | $1.58 | -$0.21 | -13% | | Total | $9.64 | $9.13 | $0.51 | 6% | - The Anti-Viral/Infection & Respiratory product category accounted for the largest portion of sales, representing 54% of total revenue in 2021[288] Competition Operating in China's fragmented pharmaceutical industry, the company faces intense competition from local and overseas manufacturers, with profitability at risk from price wars and substitute products, despite its commercialization efficiency and national sales network - The company's core competitive advantages include an efficient commercialization process, extensive product-development experience, a market-oriented portfolio, and a national sales network[66] - Profitability may be adversely affected by increased competition, price wars, or the development of superior or less costly substitute products[71] Regulations The company's operations are subject to stringent regulations by China's NMPA, including drug registration, GMP standards, and the 2019 Drug Administration Law's pilot inspection mechanism, alongside foreign currency exchange and dividend distribution rules for foreign-invested enterprises - The pharmaceutical industry in China is highly regulated by the NMPA, overseeing manufacturing, distribution, packaging, pricing, and advertising[76] - The revised Drug Administration Law, effective December 1, 2019, replaced mandatory GMP certification with a stricter pilot inspection mechanism, to which the company's production lines are subject[85] - As a foreign-invested enterprise, the company is subject to PRC foreign currency exchange regulations, requiring SAFE approval for capital account currency conversion and remittance[90] Item 1A. Risk Factors The company faces significant business, operational, and stock-related risks, including market acceptance, regulatory compliance, intense competition, distributor reliance, PRC policy changes, currency restrictions, data security laws, potential dilution, concentrated ownership, and a 'going concern' warning Risks Related to our Business and our Industry The company's business faces industry-specific risks including market acceptance, compliance with the revised Drug Administration Law, intense competition for off-patent generics, significant gross margin pressure, reliance on a limited number of distributors, and challenges from the COVID-19 pandemic and consistency evaluations - Gross profit margins significantly declined from 18.0% in 2020 to 3.6% in 2021, reflecting intense market competition and sales price pressure[109] - The company relies on a limited number of distributors, with the top five accounting for 21% of net revenues in 2021[136] - Failure to pass the mandatory 'Consistency Evaluation' for generic drugs could prevent participation in the crucial Centralized Procurement program, negatively impacting business operations[137] Risks Related to Doing Business in China Operating in China exposes the company to significant political, economic, and legal uncertainties, including PRC government policy impacts, legal system unpredictability, Renminbi currency restrictions, and evolving data security and overseas listing regulations that could require CSRC approval - Substantially all revenue is received in Renminbi (RMB), a non-freely convertible currency, subjecting the company to PRC government controls on currency conversion and potential restrictions on fund remittance out of China[183][184] - Compliance with China's new Data Security Law, Cybersecurity Law, and Personal Information Protection Law may require significant expenses and could materially affect business operations[200] - Uncertainty exists regarding whether future offerings would require approval from the China Securities Regulatory Commission (CSRC) under the M&A Rules, potentially hindering capital raising efforts[207][208] Risks Related to our Common Stock Investment in the company's common stock carries risks including price volatility, potential dilution from future issuances and a convertible note, highly concentrated ownership by the CEO and a director, and auditors' 'substantial doubt' about the company's going concern ability due to recurring losses - Auditors have raised substantial doubt about the company's ability to continue as a going concern due to recurring losses, net current liabilities, and an accumulated deficit[249] - A large portion of common stock is controlled by CEO Zhilin Li (29.2%) and director Heung Mei Tsui (19.7%), enabling significant influence over stockholder votes[239] - A convertible note issued in November 2021 could cause substantial dilution upon redemption, materially affecting stock price and earnings per share[236][237] Item 2. Properties The company's properties in Haikou, Hainan Province, PRC, include land use rights expiring in 2063 and two owned production facilities, with a new facility collateralizing a RMB 10 million line of credit from the Bank of China - The company owns two production facilities in Haikou, Hainan Province, PRC, holding land use rights for approximately 22,936 square meters expiring in 2063[256][257] Mortgaged Property for Line of Credit | Total Amount of Line of Credit | Lending Institution | Contract Period | Interest Rate | Properties under Mortgage | | :--- | :--- | :--- | :--- | :--- | | RMB 10 million (Approx. $1.54 million) | Bank of China | Sep 18, 2021 to Sep 18, 2022 | 3.85% | Helpson's new factory: 20,282.42 sq. meters | Item 3. Legal Proceedings The company is not currently aware of any legal proceedings or claims expected to have a material adverse effect on its business, financial condition, or operating results - As of the report date, the company is not involved in any material legal proceedings[262] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The company's common stock trades on the NYSE American under the symbol 'CPHI', with approximately 135 stockholders of record as of March 22, 2022, and no anticipated cash dividends due to its holding company structure and PRC currency controls - The company's common stock trades on the NYSE American under the symbol 'CPHI'[265] - The company has never paid cash dividends and does not plan to in the foreseeable future[268] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. In 2021, the company faced challenges from China's evolving pharmaceutical policies, resulting in decreased revenue to $9.6 million, a significant drop in gross margin to 3.6%, and an increased net loss to $3.4 million, despite securing a $5 million convertible note and lines of credit, leading auditors to express substantial doubt about its going concern ability Results of Operations for the Fiscal Year ended December 31, 2021 For FY2021, revenue decreased to $9.6 million due to a non-recurring 2020 sale, gross profit plummeted to $0.3 million with margin contracting to 3.6% from 18.0%, and net loss increased to $3.4 million or $0.07 per share Key Financial Results (FY 2021 vs FY 2020) | Metric | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Revenue | $9.6M | $10.9M | | Gross Profit | $0.3M | $2.0M | | Gross Margin | 3.6% | 18.0% | | Operating Loss | ($2.9M) | ($2.6M) | | Net Loss | ($3.4M) | ($2.9M) | | Loss per Share | ($0.07) | ($0.07) | - The revenue decrease was primarily due to a non-repeated one-time foreign trade order of COVID-19 testers in 2020 for approximately $1.7 million[283] - The significant decrease in gross profit margin was attributed to the high-margin one-time sale in 2020, price decreases of key products, and increased raw material and packaging costs in 2021[290] Liquidity and Capital Resources The company's liquidity is under pressure, with auditors expressing 'substantial doubt' about its going concern ability, despite securing a $5 million convertible note and several lines of credit in 2021, as future liquidity depends on achieving strategic goals and raising additional capital - In November 2021, the company issued an unsecured convertible promissory note with an original principal of $5,250,000 for proceeds of $5,000,000 to be used for general working capital[307] - The company obtained and renewed several lines of credit from Chinese banks, including a RMB 10 million line from Bank of China, collateralized by its new production facility and personally guaranteed by the CEO[303][304][306] Cash Flow Summary (in millions USD) | Cash Flow Activity | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | ($0.25) | ($0.04) | | Net Cash from Investing Activities | ($0.44) | ($0.87) | | Net Cash from Financing Activities | $4.60 | $0.62 | Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for FY2021 and FY2020, including Balance Sheets, Statements of Operations, Stockholders' Equity, and Cash Flows, with the independent auditor's report highlighting a 'going concern uncertainty' due to recurring losses and net current liabilities - The independent auditor's report expresses a fair presentation opinion but highlights 'Going concern uncertainty' due to recurring losses, net current liabilities, and an accumulated deficit[389] Consolidated Balance Sheet Highlights (as of Dec 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Assets | $22.65M | $21.12M | | Total Liabilities | $16.63M | $13.11M | | Total Stockholders' Equity | $6.02M | $8.00M | | Cash and cash equivalents | $4.86M | $0.96M | Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures were ineffective as of December 31, 2021, due to a material weakness in internal control over financial reporting stemming from a lack of U.S. GAAP-knowledgeable personnel, which the company is actively remediating - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were not effective[325] - A material weakness was identified in internal control over financial reporting due to a 'lack of accounting financial reporting personnel knowledgeable in US GAAP'[331] Part III Item 10. Directors, Executive Officers and Corporate Governance. The company's leadership includes Zhilin Li as Chairman, President, CEO, and interim CFO, with a five-member Board of Directors including three independent members who form the Audit Committee, and a code of ethics applicable to all personnel - Zhilin Li holds multiple key roles as Chairman, President, Chief Executive Officer, and interim Chief Financial Officer[337][338] - The Board of Directors includes three independent members: Gene Michael Bennett, Yingwen Zhang, and Baowen Dong, who also constitute the Audit Committee[348] Item 11. Executive Compensation Executive compensation is primarily centered on CEO Zhilin Li, whose total compensation was $241,600 for both FY2021 and FY2020, and the company's 2010 Long-Term Incentive Plan was expanded to 9 million shares for equity awards CEO Compensation (Zhilin Li) | Year | Salary | All Other Compensation | Total | | :--- | :--- | :--- | :--- | | 2021 | $225,600 | $16,000 | $241,600 | | 2020 | $225,600 | $16,000 | $241,600 | - The company's 2010 Long-Term Incentive Plan was amended to increase reserved shares from 4,000,000 to 9,000,000[355] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters As of March 22, 2022, the company's stock ownership is highly concentrated, with the five directors and executive officers beneficially owning 48.8% of outstanding common stock, including 29.2% by CEO Zhilin Li and 19.6% by director Heung Mei Tsui Beneficial Ownership of Key Insiders | Name and Title | Shares Owned | Percentage of Class | | :--- | :--- | :--- | | Zhilin Li (CEO & Chairman) | 13,810,000 | 29.2% | | Heung Mei Tsui (Director) | 9,312,651 | 19.6% | | All directors and executive officers as a group (5 persons) | 23,122,651 | 48.8% | Item 13. Certain Relationships and Related Transactions, and Director Independence. The company engaged in significant related party transactions, including outstanding loans of $1,354,567 from director Heung Mei Tsui and net advances of $1,425,123 from CEO Zhilin Li as of December 31, 2021, while three of its five directors are determined to be independent - As of December 31, 2021, the company had outstanding loans from director Heung Mei Tsui totaling $1,354,567[367] - The company received net advances from its Chairperson and CEO, Zhilin Li, totaling $1,425,123 as of December 31, 2021[368] Item 14. Principal Accountant Fees and Services For FY2021 and FY2020, the company incurred approximately $100,000 in audit fees and $5,400 in tax fees annually from its principal accountant, B F Borgers CPA PC, with all services pre-approved by the Audit Committee Accountant Fees (2021 & 2020) | Fee Category | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | ~$100,000 | ~$100,000 | | Audit-Related Fees | $0 | $0 | | Tax Fees | $5,400 | $5,400 | | All Other Fees | $0 | $0 | Part IV Item 15. Exhibits, Financial Statement Schedules. This section lists the documents filed as part of the annual report, including China Pharma Holdings, Inc.'s financial statements and an index of exhibits such as articles of incorporation, bylaws, material contracts, and CEO/CFO certifications - This part includes the company's consolidated financial statements and a list of all exhibits filed with the 10-K report[376][377]