ITEM 1. BUSINESS
Overview
We are principally engaged in the development, manufacture and marketing of pharmaceutical products for human use in connection with a variety of high-incidence and high-mortality diseases and medical conditions prevalent in the People’s Republic of China (the “PRC”). All of our operations are conducted in the PRC, where our manufacturing facilities are located. We manufacture pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions. The majority of our pharmaceutical products are sold on a prescription basis and all have been approved for at least one or more therapeutic indications by the National Medical Products Administration (the “NMPA”, formerly China Food and Drug Administration, CFDA) based upon demonstrated safety and efficacy.
As of December 31, 2020, we manufactured 19 pharmaceutical products for a wide variety of diseases and medical indications, each of which may be classified into one of three general categories:
●Basic generic drugs, which are common drugs in the PRC for which there is a very large market demand;
●First-to-market generic drugs, which are generic Western drugs that are new to the PRC marketplace; or
●Modern Traditional Chinese Medicines, which are generally comprised of non-synthetic, plant-based medicinal compounds of the type that have been widely used in the PRC for thousands of years, to which we apply modern production techniques to produce pharmaceutical products in different formulations, such as tablets, capsules or powders.
In selecting generic drugs to develop and manufacture, we consider several factors, including the number of other manufacturers currently producing a particular drug, the size of the market for that drug, the proposed or required method of distribution, the existing and expected pricing for that particular drug in the marketplace, the costs of manufacturing that drug, and the costs of acquiring or developing the formula for that drug. We believe we have historically selected generic drugs for manufacture that have large addressable markets and higher profit margins relative to other generic drugs manufactured and distributed in the PRC.
In addition, we manufactured one comprehensive healthcare product and two protective products.
We currently own and operate two production facilities in Haikou, Hainan Province, PRC, one of which has a construction area of 663.94 square meters. The other factory has two buildings with production area of 20,282.42 square meters and 6,593.20 square meters. We implement quality control procedures in this facility in compliance with the PRC’s Good Manufacturing Practices, or GMP standards, and applicable NMPA regulations to ensure consistent quality in our products.
The NMPA promulgated Good Manufacturing Practices for Pharmaceutical Products (2010 revised version) on February 12, 2011 (effective as of March 1, 2011) (the “Year 2011 GMP”). The Year 2011 GMP standards outline the basic principles and standards for the manufacturing of pharmaceutical products and the management of quality controls in the pharmaceutical products manufacturing industry in the PRC. All of our production lines: tablets, capsules, dry power, liquid injectables, solid oral solution Cephalosporins (specifically designated), are in full compliance with the Year 2011 GMP standard. A newly revised Drug Administration Law (the “New Law”) came into effect on December 1, 2019, which cancelled the GMP certification but impose the pilot inspection mechanism in the event any production line(s) does not satisfy any pilot inspection under the New Law, the production on such production line(s) could be suspended.
We market and sell our products through 16 sales offices covering all major cities and provinces in the PRC. To comply with applicable Chinese laws relating to sales of prescription drugs to certain hospitals and clinics, we also use a distribution system comprised of over 1,000 independent prefecture-level, city-level, and county-level distributors. Our sales system has further developed and expanded with the expansion of Chinese healthcare reform, and our 16 provincial offices deliver our products to basic health care institutions as well as tier two and tier three hospitals through the above mentioned distributors.
Our corporate organizational chart is set forth below.
Industry Background and Market Opportunities
We have observed the following trends in China's healthcare industry in recent years:
1. The level of basic medical insurance has been improved in an all-round way. According to The 2019 Communique on Statistics on the Development of HealthCare in China (hereinafter referred to as Communique) published by Chinese National Health Insurance Administration on June 6, 2020, more than 1.35 billion people participated in Basic Medical Insurance System (BMIS) in 2019, and the participation rate remained stable at more than 95%. The reimbursement rate for hospital expenses of Basic Medical Insurance System for Urban Employees (BMISUE) and Urban and Rural Residences Medical Insurance System (URRMIS) has been raised to more than 60%.
2. Expenditures on essential medicines have decreased significantly. As per the Communique, the proportion of expenditure on essential medicines in health institutions at all levels. After the abolition of “drug adds-on”, in public hospitals, the share of drug revenue in total income has declined from 46.33% in 2010 to 32.71% in 2018; the average drug costs per outpatient rate as a percentage of total costs has fell from 51.5% in 2009 to 40.6% in 2019; while drug costs as a percentage of total hospitalization expenses fell from 43.6% in 2009 to 27.5% in 2019. In Community Health Centres, the proportion of medicines to hospitalization costs was 35.4% in 2019, down 13.9 % from 2010 levels. In township hospitals, the proportion of hospitalization cost of medicines to total expenditure was 38.5% in 2019, down 14.4% from 2010.
3. The capacity of health services in primary-level institutions is growing. In the case of township hospitals, there has been a significant increase in the number of visits and hospitalizations, with the number of beds per 10,000 agricultural population rising from 10.50 in 2009 to 14.80 in 2019. In 2020, the central government spent RMB50.38 billion on basic public health services, and RMB9.95 billion on COVID-19 prevention and control for grass-roots medical institutions.
4. The System of Graded Diagnosis and Treatment (SGDT) has been steadily advanced. The primary community health service center and the second and third-level hospitals was open as a medical union in cities, to achieve the sharing of medical and health resources between regions.
The General Office of the State Council of China issued The Key Tasks for Deepening the Reform of the Medical and Health System in the Second Half of 2020 (hereinafter referred to as the Tasks) on July 23, 2020.
The Tasks pointed out that since the outbreak of COVID-19, our medical and health system has stood the test and played an important role in winning the battle with this epidemic. In the second half of 2020, the Tasks urged us to promote the deepening of medical reform and the prevention and treatment of the COVID-19 epidemic, put prevention in a more prominent position, and continue to transfer from a treatment-centred approach to a population health-centred approach. We continue to reform medical care, medical insurance and medicine, and focus on solving the problem of "inadequate and overly expensive medical services".
With the growth of China’s per capita income, people’s awareness of health care has been gradually increasing. Medical consumption expenditure and consumer demand for higher-level health care are expected to continue to grow. In early March 2021, China's vice minister of Ministry of Human Resources and Social Security said at a press conference that people aged 60 and over had reached 18.1% of the overall population by the end of 2019, and that the country's elderly population is expected to exceed 300 million in the coming five years. According to the China Development Research Foundation's China Development Report 2020, Chinese aging populations will peak during 2035 to 2050, and that by 2050, China's elderly population aged 60 and over will be close to 500 million, accounting for more than a third of the total population. In view of the increased awareness of health care and the ageing society, the increasing industry concentration and internationalization, and the fact that NMPA initiated policies to encourage mergers and reorganizations among business entities to seek joint development, we are optimistic about the development of China’s pharmaceutical industry.
Impact from the New Coronavirus Global Pandemic (“COVID-19”)
Since the end of 2019, the COVID-19 outbreak has spread around the world: from January to February 2020 in China, to February to April 2020 in the United States, Italy, Spain and other European and American countries, to April to August in the United States, India, Brazil, Russia, till the second outbreak in Europe and other regions in August, overseas outbreaks continue to ferment. In December 2020, situation in the United Kingdom continues to deteriorate.
The outbreak of COVID-19 has a material and adverse effect on the Company’s business operations. These included, but are not limited to, disruptions or restrictions on our ability to travel or to distribute our products, as well as temporary closures of our facilities or the facilities of our suppliers or customers in early 2020. The Company reopened its facility and ramped up its operations in the first quarter 2020. In addition, COVID-19 not only brought a widespread health crisis, it also adversely affected the economies and financial markets in China and many other countries, resulting in an economic downturn that could significantly impact the Company operating results.
The Chinese government has responded positively to the COVID-19 outbreak by introducing a series of policies in a timely manner, including:
The General Office of the National Health and Wellness Commission of China issued the “Notice on Further Improving the Emergency Response Capacity of Pre-Hospital Medical Care under the Normalization of the Prevention and Control of the COVID-19” on July 15, 2020.
China's National Health and Wellness Commission officially announced the “COVID-19 Prevention and Control Program (7th Edition)” on September 16, 2020.
Since the release of COVID-19 vaccine in December 2020, the world is making every effort to accelerate the vaccination progress. However, although the vaccine has played a positive role in the prevention and control of the epidemic, and the number of new daily incurred cases of COVID-19 has dropped for six weeks in the world, WHO officials say the apparent turning point of the global outbreak has not arrived, and the task to prevent and control the epidemic remains daunting. Michael Ryan, WHO's head of the health emergency program, spoke on a news conference on March 1, 2021 local time that it was impossible to end the outbreak this year. At present, the focus is to control the spread of the new coronavirus and to avoid the virus mutation, and to improve the speed of vaccination at the same time.
Consistency Evaluation for Generic Drugs
The “consistency evaluation of generic drugs” refers to the evaluation of generic drugs that were approved for market, for the consistency with the quality and efficacy of the original drug. The goal is for generic drugs to achieve the same level of quality and efficacy as the original drugs and to replace the original drugs in clinical use. This can not only save medical expenses, but also improve the development of the pharmaceutical industry, and to ensure the safety and effectiveness of public drug use.
The State Council issued the Pilot Program for the Central Procurement and Use of Drugs by State Organizations (the “Program”) on January 17, 2019. The Program calls for the selection of pilot drugs from generics that have passed the "consistency evaluation", and for centralized procurement and use in order to reduce drug prices and reduce patient drug costs. According to documents of the third batch of national centralized procurement issued in July 2020, generic products are required to pass the NMPA’s generic drug consistency evaluation to be eligible for procurement.
NMPA issued an official document on The Implementation of the Evaluation of the Quality and Efficacy of Chemical Injection Generics on May 14, 2020, requiring consistency evaluation for generics of pharmaceutical injections that are already on the market. According to the CPM New Drug Research and Development Monitoring Database, a total of 183 chemical injections passed the consistency evaluation in 2020.
Our company has actively promoted the consistency evaluation process of several key current existing oral products in 2020. We have a product that passed biological equivalents experiments of consistency evaluation in March 2021. We plan to submit its relevant documentation and data to NMPA in the near future.
The PRC’s medical insurance system
The New Rural Cooperative Medical System (NRCMS) was officially launched in rural areas in 2003. It is a critical illnesses-oriented medical assistance system for farmers, and has achieved full coverage in 2008. In towns and cities, The Urban Residences Medical Insurance System (“URMIS”) has been in operation since 2007. It provides medical security for urban residents through financing organized by the government, with residents' contributions as the main source of funds and supplemented by appropriate government subsidies. In order to further expand the coverage of medical insurance and coordinate the economic and social development of urban and rural areas, in January 2016, the State Council issued the Opinions on the Integration of the Basic Medical Insurance System for Urban and Rural Residents (the Opinion). The Opinion proposes to integrate the NRCMS and URMIS, to establish a unified basic medical insurance system for urban and rural residents, and further unify the operation of services and information systems to improve the quality and efficiency of operation.
According to the Communique, 329 million people participated in health insurance for workers and 1,024 million people participated in medical insurance for urban and rural residents. The total income of the basic medical insurance fund was RMB2442.1 billion, an increase of 10.2% over the previous year, accounting for about 2.5% of GDP in the current year, The total expenditure was RMB2085.4 billion, an increase of 12.2% over the previous year, and the cumulative balance was RMB276.97 billion. Experts pointed out that in 2019, the URRMIS has been fully integrated, the scale of the medical insurance fund has been expanded, and the anti-risk capacity of the medical insurance fund has been improved.
Our Strategy
We believe that the pursuit of innovation is imperative for providing the basic medical solutions needed by the majority of patients. We are passionate about protecting human health, and we always adhere to the highest standards of ethics and integrity to fulfill our firm commitment to our customers and patients.
We believe we are well-positioned in a comparatively steadily growing industry in one of the fastest-growing economies in the world. China's per capita GDP exceeds US$10,000 in 2019, which stimulates consumption structure upgrade, and the establishment of a high-quality health care system. We currently manufacture a number of off-patent branded generic drugs. Our diverse portfolio of products and new product pipelines include products for high-incidence and high-mortality conditions in the PRC, such as cardiovascular, central nervous system (“CNS”), infectious, and digestive diseases. We launched wash-free sanitizers and various types of masks since the outbreak of COVID-19 at year end 2019. In addition, we continue to explore comprehensive healthcare market after the launch of Noni enzymes in 2018.
Consistency evaluation of our current existing major products will be the focus of our strategy in the near future. The consistency evaluation of generic drugs will improve Chinese generic drugs quality and eliminate unqualified enterprises, so that high-quality generic drug companies are expected to benefit from it. Consistency evaluation, together with the GPO, is optimizing the competitive landscape of the Chinese pharmaceutical industry. We believe that the market space and growth potential of Chinese generic drugs are huge.
A series of medical reform policies introduced in recent years has profound and far-reaching impact on pharmaceutical companies. Therefore, early consideration of the transformation and upgrading, as well as product positioning become very important. Based on our experience in R&D, production and marketing experiences, and our market insights, we have decided to gradually adjust our strategy to produce generic and innovative drugs with high value in pharma-economics, good clinical efficacy and market differentiation. These include drugs that treat chronic diseases prevalent in China, geriatric diseases, cancers, and nutritional products.
In addition, as another direction of strategic development, we will actively explore connectivity on the Internet. We will take the initiative to learn, participate, and put our products to the online market, to achieve online and offline connectivity of a complete ecological system.
Our objective is to leverage our expertise in the PRC for the development, manufacture and commercialization of pharmaceutical products. We intend to achieve this objective by:
Promoting Our Existing Brands to Increase Our National Recognition. We intend to support and grow the existing recognition and reputation of our brands and to maintain our branded pricing strategy through continued sales and marketing efforts through our new, upgraded GMP-compliant production lines. To achieve this goal, we plan to promote the efficacy and safety profile of our established prescription pharmaceutical products to physicians at hospitals and clinics in all provinces of PRC through the efforts of our sales force, independent distributors and educational physician conferences and seminars.
Promoting the progress of consistency evaluation of our current existing main products. We intend to cope with the latest policies and the GPO requirements. We aim to make efficient use of our existing human and material resources, and strive to create favorable conditions for product sales and international development through gaining a favorable result in the consistency evaluation.
Exploring the market for comprehensive health products. To advocate a healthy way of life, we intend to explore the market for comprehensive health products and help our customers not only ‘cure the disease’, but also ‘prevent potential diseases’, eliminate sub-health, improve physical fitness, reduce pain, and maintain good health management.
Expanding Our Distribution Network to Increase Market Penetration. We intend to expand our reach beyond our current 16 offices in the PRC to drive additional growth of our existing and future products. We currently contract with over 1,000 distributors in the PRC and plan to expand on these relationships to target new markets. We will continue our conservative sales strategy of increased cooperation with customers with reliable accounts receivable collection performance. In addition, we plan to continue to broaden our marketing efforts outside of major cities in the PRC and to increase our market penetration in cities and rural areas where we already have a presence. Over the long term, we also intend to expand our presence beyond the PRC to international markets by working with international pharmaceutical companies to cross-sell our products.
Acquiring Complementary Products Lines, Technologies, Distribution Networks and Companies. We intend to selectively pursue strategic acquisition opportunities that we believe will grow our customer base, expand our product lines and distribution network, enhance our manufacturing and technical expertise or otherwise complement our business or further our strategic goals. Pursuing strategic acquisitions is a significant component of our growth strategy. The Company has not identified any strategic acquisition opportunities as of the date of this report on Form 10-K.
Products
We currently have a product portfolio of 22 products, including 19 pharmaceutical products that address a wide variety of diseases and medical indications, and the remaining are comprehensive healthcare and protective products. All of our pharmaceutical products have demonstrated safety and efficacy in clinical trials sufficient to obtain approval by the NMPA and are sold on a prescription basis. The following table summarizes the approved indications for our marketed products and the year in which each of such products was first marketed to our customers.
The following table sets forth the aggregate amount our revenues attributed to our product portfolio by indication group for the years ended December 31, 2020 and 2019.
Due to the nature of the pharmaceutical industry, we continually strive to change our product portfolio to respond to changes in market demand. Based on a foundation established by a number of our widely-recognized prescription products, such as Cefaclor and Roxithromycin, we have launched and will continue to launch a variety of pharmaceuticals. The core criteria for our selection of potential pipeline products are strong market demand, proven efficacy, and safety. In an effort to gain an advantage in the marketplace, we often seek to improve the production process of the new generic products we elect to manufacture or to improve the quality of a proposed product to increase its efficacy.
We also adjust the delivery systems and marketing for each of our products based on the product’s target patient group. We believe that maintaining a variety of delivery systems (e.g. tablets, capsules, injectables and dry powders) for certain of our products targeted at different groups enhances our competitive position in the marketplace. As a result, our sales and marketing personnel work closely with management and our research and development personnel to determine which of our products can successfully be marketed for more than one delivery system and which generic drugs in the marketplace may be good candidates for us to manufacture and distribute using different delivery systems.
Product Development
Research & development and innovation represent the core competitive advantage for a company’s sustainable growth. For pharmaceutical companies, products with proprietary intellectual property are not only strategic resources for comprehensive strength, but also important tools to engage in social responsibility. We have been focusing on the research and development of both first generic drugs and innovative drugs. Additionally, we also have actively worked to meet unsatisfied medical needs by sticking to a market-oriented approach and continuously improving the effectiveness and ease of use of our drugs, supported by a well-designed system for intellectual property management.
The PRC State Council issued “Opinions on Carrying out Consistency Evaluation on Quality and Efficacy of Generic Drugs” on March 5, 2016, requiring all manufacturers of generic chemical pipeline products to carry out Consistency Evaluations before they may obtain final registration approval. Drugs failing to meet these requirements may not be re-registered.
Currently, due to this newly issued policy, as with all other Chinese generic pharmaceutical companies, the NMPA production approved standards and experimental requirements for almost all of our pipeline products have undergone major adjustments.
The Company's recent research and development work is mainly aimed at promoting the consistency evaluation of several major products already on the market, as well as the continued exploration of comprehensive health product categories.
Distribution and Customers
We believe we have a well-established sales network. As our current pharmaceutical product portfolio is comprised mainly of prescription drugs, our major sales targets are hospitals. As of December 31, 2020, we also have 16 sales offices covering all major provinces of China, and over 1,000 sales representatives who assist in managing many of our relationships with hospitals, doctors and local drug distributors.
Due to the nature of our products and current governmental regulations, all of our customers are located in the PRC. We have established long-standing relationships with most of our key customers through our operating subsidiary, Helpson, which was formed in 1993.
Production Facilities
We manufacture and package our products at our manufacturing facility in the Haikou Free Trade Zone in Haikou, Hainan Province. Our old manufacturing facility, which was built in 2002, is approximately 8,000 square meters; and our new building, approximately 20,000 square meters, was completed in 2013. We have production lines with the 2011 version of GMP certificates for different forms of our products including: tablets, capsules, dry power, liquid injectables, solid oral solution Cephalosporins (specifically designated).
All of our existing production lines have met the GMP Standards which became effective as of March 1, 2011. On December 1, 2019 the newly revised Drug Administration Law (the “New Law”) came into effect, which cancelled the GMP certification but impose the pilot inspection mechanism.
Raw Materials
We require a supply of a wide variety of raw materials to manufacture our products. We employ purchasing staff with extensive knowledge of our products who work with our product development, and formulations and quality control personnel to source raw materials for our products. Currently, we rely on numerous suppliers in the PRC and overseas to deliver our required raw materials and believe we have at least three principal suppliers for each of our most critical raw materials. Historically, we have not had difficulty obtaining raw materials from suppliers. For the year ended December 31, 2020, our purchases of raw material purchases from our three top suppliers accounted for 20.7%, 17.7%, and 13.5%, respectively. For the year ended December 31, 2019 suppliers accounted for 22.3%, 20.6% and 5.8%, respectively.
Competition
We believe we have established a commercially competitive position in the highly-fragmented pharmaceutical industry in China through our core competitive advantages, as described below:
We have a highly-efficient commercialization process for new products, including significant experience with the NMPA registration process.
We have over 20 years of product-development experience during which time we have implemented processes to efficiently introduce and market new and existing products to the Chinese market.
We have a market-oriented product portfolio and product lines.
Our product focus is on developing and manufacturing medicines that help large patient groups, such as the infectious disease and cardio vascular disease patient groups. Our diversified GMP-certified manufacturing facility includes various production lines targeting a variety of delivery mechanisms, such as tablets, capsules, cephalosprine tablets, cephalosprine capsules, liquid-injectables and dry powder injectables, which enables us to effectively manufacture a broad range of new drugs.
We have product diversification to target specific sub-markets.
We attempt to differentiate our products from those of our competitors by changing, and, in many cases, improving certain physical aspects of our products to market to different market segments. For example, to make our Cefaclor product more patient friendly to children and patients with swallowing problems, we added an enteric coating to make our tablets easier to swallow.
We have a national sales network and a highly-trained marketing team.
Our experienced sales team has the industry knowledge and know-how to synergistically combine our strong market insight with a successful commercialization platform.
We have developed high-quality relationships with leading hospital and clinic administrators and physicians.
While sales of our pharmaceutical products to hospitals are made through our distributors, we believe our long-term relationships with leading hospitals and healthcare clinics throughout China resulting from our long-term promotional efforts and periodic physician seminars improve the perception of our products in the marketplace and help us identify and select high-volume drugs to develop into new generic products relatively early in the process.
Notwithstanding such favorable positioning, we are subject to intense competition. There are both local and overseas pharmaceutical enterprises that are engaged in the manufacture and sale of potential substitute or similar pharmaceutical products in the PRC. These competitors may have more capital, better research and development resources, better manufacturing and marketing capability, and more experience than we do.
Our profitability may be adversely affected if:
● the number of our competitors increases;
● competitors engage in increased price competition; or
● competitors develop new products or product substitutes having comparable medicinal applications or therapeutic effects that are more effective, less costly and/or have more perceived benefits than those produced by us.
In addition, imported products and China’s admission as a member of the World Trade Organization (“WTO”) creates increased competition. The PRC became a member of the WTO in December 2001. As a result, competition in the pharmaceutical industry in the PRC intensified generally in two respects. First, with lower import tariffs, imported pharmaceutical products manufactured overseas may become increasingly competitive in terms of pricing. Second, we believe that well-established foreign pharmaceutical manufacturers may set up production facilities in the PRC and compete with domestic manufacturers directly. With the expected increased supply of competitively-priced pharmaceutical products in the PRC, we may face increased competition from foreign pharmaceutical products, especially in terms of high-end pharmaceutical products, including certain types of products manufactured by U.S. manufacturers.
Intellectual Property
We regard our packaging designs, trademarks, trade secrets, patent and similar intellectual property as parts of our core competence that are critical to our success. We rely on patent, trademark and trade secret law, as well as confidentiality agreements with certain of our employees, distributors and others to protect our intellectual property rights.
In November 2008, we purchased the patented medical formula for a cerebral/cardio-vascular indication and the manufacturing processes for that product from a third party laboratory. In connection with that acquisition, we obtained the title of the patent. This patent expires in 2025.
In 2012, we acquired another patent related to a medical formula for the treatment of cerebral/cardio-vascular diseases. This patent expires in 2029.
As of December 31, 2020, we owned 18 registered trademarks, including marks for eight of the 19 pharmaceutical products we manufacture, including the tradenames Fukexing, Beisha, Shiduotai, Xinuo, Pusenlitai, Pusenouke, Shuchang, Shenkaineng, XERONINE, and Aronino, as well as marks for our AFGF logo, our HPS logo, our two HELPSON logos and four other logos. The registration numbers of the 18 registered trademarks are as follows: No.1500459, No.1511770, No.1535416, No.1537828, No.1535420, No.1272792, No.1272760, No.1330294, No.1327731, No.1330295, No.3993785, No. 4074317, No.4074321, No. 4315247, No. 32445705, No. 32437940, No. 34711564, and No. 34711561.
Environmental Matters
We comply with the Environmental Protection Law of China as well as applicable local regulations. In addition to statutory and regulatory compliance, we actively ensure the environmental sustainability of our operations. Penalties may be levied upon us if we fail to adhere to and maintain certain standards. Such failure has not occurred in the past, and we do not anticipate that it will occur in the future, but no assurance can be given in this regard.
Regulations
Regulations Relating to Pharmaceutical Industry. The pharmaceutical industry in China is highly regulated. The primary regulatory authority is the NMPA, including its provincial and local branches. As a developer and producer of medicinal products, we are subject to regulation and oversight by the NMPA and its provincial and local branches. The Law of the PRC on the Administration of Pharmaceuticals provides the basic legal framework for the administration of the production and sale of pharmaceuticals in China and covers the manufacturing, distribution, packaging, pricing and advertising of pharmaceutical products. These regulations set forth detailed rules with respect to the administration of pharmaceuticals in China. We are also subject to other PRC laws and regulations that are applicable to business operators, manufacturers and distributors in general.
Registration and Approval of Medicine. Pursuant to the PRC Provisions for Drug Registration, a medicine must be registered and approved by the NMPA before it can be manufactured and sold. The registration and approval process requires the manufacturer to submit to the NMPA a registration application containing detailed information concerning the efficacy and quality of the medicine and the manufacturing process and the production facilities the manufacturer expects to use. A series of policies on consistency evaluation and drug review process have been issued in recent years, and potentially more reforms and adjustments are underway in order to promote the pharmaceutical industry in China in line with the international standards. In this context, we believe that the uncertainties in the timetables for obtaining NMPA production approvals for products under research are increasing. If a manufacturer chooses to manufacture a pre-clinical medicine, it is also required to conduct pre-clinical trials, apply to the NMPA for permission to conduct clinical trials and go through the clinical trials. If a manufacturer chooses to manufacture a post-clinical medicine, it only needs to go through the clinical trials. In both cases, a manufacturer needs to file clinical data with the NMPA for approval for manufacturing after clinical trials are completed.
New Medicine. If a new medicine is approved by the NMPA, the NMPA will issue a new medicine certificate to the manufacturer and impose a monitoring period of one to five years. During the monitoring period, the NMPA will monitor the safety of the new medicine, and will neither accept new medicine certificate applications for an identical medicine by another pharmaceutical company, nor approve the production or import of an identical medicine by other pharmaceutical companies. As a result of these regulations, the holder of a new medicine certificate has the exclusive right to manufacture it during the monitoring period. We currently have the new medicine certificates for our Pusenouke, Cefaclor dispersible tablets and Roxithromycin dispersible tablets and Bumetanide for injection products.
National Production Standard and Provisional Standard. In connection with the NMPA’s approval of a new medicine, the NMPA will normally direct the manufacturer to produce the medicine according to a provisional national production standard, or a provisional standard. A provisional standard is valid for two years, during which time the NMPA closely monitors the production process and quality consistency of the medicine to develop a national final production standard for the medicine, or a final standard. Three months before the expiration of the two-year period, the manufacturer is required to apply to the NMPA to convert the provisional standard to a final standard. Upon approval, the NMPA will publish the final standard for production. The NMPA has no statutory timeline to complete its review and grant approval for the conversion. In practice, the approval for conversion to a final standard is time-consuming and could take a number of years. However, during the NMPA’s review period, the manufacturer may continue to produce the medicine according to the provisional standard.
Transitional Period. Prior to the latter of (1) the expiration of a new medicine’s monitoring period or (2) the date when the NMPA grants a final standard for a new medicine after the expiration of the provisional standard, the NMPA will not accept applications for an identical medicine nor will it approve the production of an identical medicine by other pharmaceutical companies. Accordingly, the manufacturer will continue to have an exclusive production right for the new medicine during this transitional period.
Continuing NMPA Regulation
Pharmaceutical manufacturers in China are subject to continuing regulation by the NMPA. If the labeling or its manufacturing process of an approved medicine is significantly modified, a new pre-market approval or pre-market approval supplement will be required by the NMPA. A pharmaceutical manufacturer is subject to periodic inspection and safety monitoring by the NMPA to determine compliance with regulatory requirements.
The NMPA has a variety of enforcement actions available to enforce its regulations and rules, including fines and injunctions, recall or seizure of products, the imposition of operating restrictions, partial suspension or complete shutdown of production and criminal prosecution.
Pharmaceutical Product Manufacturing
Permits and Licenses for Pharmaceutical Manufacturers. A pharmaceutical manufacturer must obtain a pharmaceutical manufacturing permit from the NMPA’s relevant provincial branch. This permit is valid for five years and is renewable for an additional five-year period upon its expiration. Our current pharmaceutical manufacturing permit, issued by the NMPA, will expire on November 8, 2025. We are confident the permit could be renewed before its expiration.
Good Manufacturing Practice. A pharmaceutical manufacturer must meet the Good Manufacturing Practice standards, or GMP standards, for each of its production facilities in China in respect of each form of pharmaceutical product it produces. GMP standards include staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production management, quality control and customer complaint administration. Prior to December 1, 2019, if a manufacturer meets the GMP standards, the NMPA will issue to the manufacturer a Good Manufacturing Practice certificate, or a GMP certificate, with a five-year validity period. However, for a newly-established pharmaceutical manufacturer that meets the GMP standards, the NMPA will issue a GMP certificate with only a one-year validity period. The Year 2011 GMP Standards became effective on March 1, 2011, and pharmaceutical manufacturers (except for manufacturers of injectables, blood products or vaccines, which had a three-year grace period) had a five-year grace period to upgrade existing facilities to comply with the revisions.
All of our existing production lines have met the Year 2011 GMP Standards. On December 1, 2019, the newly revised Drug Administration Law (the “New Law”) came into effect. One of the major amendments is the cancellation of GMP certification. The New Law eliminated the requirement that drug administration authorities shall assess drug manufacture enterprises and drug trading enterprises, and issue assessment certificates. Instead, it requires that drug manufacturing enterprises and drug trading enterprises establish and improve the quality management systems of manufacture and trade of drugs, and ensure that the process of manufacturing and trading of drugs always meets all legal requirements. This means a stricter form of supervision is implemented comparing to the prior GMP certificates system and our production lines are subject pilot inspection under the New Law.
Product Liability and Consumers Protection
Product liability claims may arise if any of our pharmaceutical products have a harmful effect on a consumer, who may make a claim for damages or compensation as an injured party. The General Principles of the Civil Law of the PRC, which became effective in January 1987, state that manufacturers and sellers of defective products causing property damage or injury shall incur civil liabilities for such damage or injuries.
The Product Quality Law of the PRC was enacted in 1993 and amended in 2000 to strengthen the quality control of products and protect consumers’ rights and interests. Under this law, manufacturers and distributors who produce or sell defective products may be subject to confiscation of earnings from such sales, revocation of business licenses and imposition of fines, and in severe circumstances, may be subject to criminal liability.
The Law of the PRC on the Protection of the Rights and Interests of Consumers was promulgated on October 31, 1993 and became effective on January 1, 1994 to protect consumers when they purchase or use goods or services. All business operators must comply with this law when they manufacture or sell goods and/or provide services to customers. In extreme situations, pharmaceutical product manufacturers and distributors may be subject to criminal liability if their goods or services lead to the death or injuries of customers or other third parties.
Price Controls
Since October 2015, with the approval of the State Council, 16 ministries (bureaus) including the Health and Family Planning Commission have established departmental coordination mechanisms and organized the first batch of pilot national drug price negotiations. Thereafter, the dynamic adjustment of the national health insurance catalogue began. In the past five years, China has gradually established a dynamic adjustment mechanism for basic medical insurance drugs and optimized the structure of drugs in the catalogue.
For the health care negotiations, the health insurance fund plays a "strategic buyer" role and uses "quantity-for-price" to create a significant drop in drug costs. The adjustment of the health insurance catalogue focuses on improving the efficiency of the use of health insurance funds and using limited resources to maximize the clinical benefits of patients.
In July 2020, the State Administration of Health Insurance issued the Interim Measures for the Administration of Drug Use in Basic Medical Insurance, which further clarified the establishment and improvement of the dynamic adjustment mechanism In principle, the catalogue will be adjusted once a year.
In addition, the State also organizes centralized procurement of medicines. With a large number of procurement, the State is able to obtain high-quality low-cost drugs. The General Office of the State Council issued the Opinions of the General Office of the State Council on Promoting the Normal Institutionalization of Centralized Procurement of Drugs on January 28, 2021.
In the future, certain generic drugs will be selected to enter the centralized procedure after a consistency evaluation, result in a significant price reduction in exchange for sales volume.
Other Regulations
In addition to the regulations relating to pharmaceutical industry in China, we are also subject to the regulations applicable to a foreign invested enterprise in China.
Foreign Currency Exchange. Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and various regulations issued by the State Administration of Foreign Exchange, or the SAFE, and other relevant PRC government authorities, Renminbi is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interests and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from the SAFE or its local counterpart for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.
Payments for transactions that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies other than foreign investment enterprises (FIEs) must convert foreign currency payments they receive from abroad into Renminbi. On the other hand, FIEs may retain foreign currency in accounts with designated foreign exchange banks, subject to a cap set by the SAFE or its local counterpart.
Dividend Distribution. Under the PRC regulations governing dividend distributions by wholly foreign-owned enterprises and Sino-foreign equity joint ventures, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends.
Employees
As of December 31, 2020, we had 248 employees, among which 237 employees were full-time employees and 11 employees were temporary employees. None of our employees is represented by a labor union and, in general, we consider our relationship with our employees to be good.
As required by applicable Chinese law, we have entered into employment contracts with substantially all of our officers, managers and employees. We are working towards entering into employment contracts with those employees who do not currently have employment contracts with us. The PRC enacted a new Labor Contract Law, which became effective on January 1, 2008. We have updated our employment contracts and employee handbook and are in compliance with such law.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risk Factor Summary
The following are some material risks, any of which could have an adverse effect on our business financial condition, operating results, or proepsects.
●Risks Related to our Business and our Industry
oIf our products do not attain market acceptance among the medical community, our operations and profitability would be adversely affected;
oIf we fail to meet standards pursuant to the newly revised Drug Administration Law, certain production lines will be suspended and our profitability would be adversely affected;
oWe may be subject from time to time to product recalls initiated by us or by the NMPA. Product recalls could impose significant costs on us and adversely affect our ability to generate revenue;
oIf we fail to develop new products with high profit margins and our high-profit-margin products are replaced by competitors’ products, then our gross will be adversely affected;
oMost of our products are off-patent branded generics that can be manufactured and sold by other pharmaceutical manufacturers in the PRC which may increase the competition we face;
oIf we are not able to maintain and enhance our brand recognition to maintain our competitive advantage, our reputation, business and operating results may be harmed;
oReimbursement may not be available for our products, which could diminish our sales;
oThe growth and success of our business depend on our ability to successfully market our principal products to hospitals and their selection for medicine purchases;
oOur future research and development projects may not be successful;
oWe cooperate with research institutions and universities in the PRC for the research and development of certain new products and any failure of such research institutions to meet our timing and quality standards may pose impairment loss on our financial results and our failure to continue such collaborative arrangement could adversely affect our ability to develop new pharmaceuticals and our overall business prospects;
oWe may not be able to obtain regulatory approval for any of the new products and failure to obtain these approvals could materially harm our business;
oNew product development in the pharmaceutical industry is time-consuming and costly and has a low rate of successful commercialization;
oWe may not be able to successfully identify and acquire new products or businesses;
oWe rely on distributors for all of our revenues and failure to maintain relationships or to otherwise expand our distribution network would materially and adversely affect our business;
oWe rely on a limited number of distributors for the majority of sales of our products;
oOur operations may be affected if we could not pass the Consistency Evaluation requirement issued by the State Council for any of our current existing products;
oWe face risks related to health pandemics that could impact our sales and operating results;
oOur operations may be affected if we could not obtain raw materials from our current key suppliers on acceptable terms;
oWe may not be able to effectively manage our employees and distribution network, and our reputation, business, prospects and brand may be materially and adversely affected by actions taken by our distributors and third party marketing firms;
oWe have limited insurance coverage and may incur losses resulting from product liability claims, business interruptions or claims that could be covered by D&O Insurance;
oOur future liquidity needs are uncertain and we may need to raise additional funds in the future;
oThe failure to manage growth effectively could have an adverse effect on our business;
oIf we are unable to attract and retain key personnel, it could adversely affect our ability to develop and market our products;
oIf infringement or counterfeiting of our intellectual property rights occurs, then our reputation and business may be adversely affected;
●Risks Related to Doing Business in China
oAdverse changes in political and economic policies of the PRC government could have a material and adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position;
oThe PRC legal system has inherent uncertainties that could limit our legal protections;
oPRC economic reform policies could result in a total investment loss in our common stock;
oYou may experience difficulties in bringing original actions in the PRC against our company or our management based on U.S. or other foreign laws;
oAs a Foreign Invested Company in China, Helpson’s ownership structure may be impacted by the foreign investment regulation and its measures in China;
oBecause we receive substantially all of our revenue in Renminbi, which currently is not a freely convertible currency, we are subject to changes in the PRC’s political and economic decisions;
oWe cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially for foreign exchange transactions;
oFailure to comply with PRC regulations regarding the registration requirements for employee equity incentive plans may subject us to fines and other legal or administrative sanctions;
oThe enforcement of new labor contract law and its implementation rules and increase in labor costs in the PRC may adversely affect our business and our profitability;
oDividends payable by us to our foreign investors and gain on the sale of our shares may become subject to taxes under PRC tax laws;
●Risks Related to our Common Stock
oThe market price for our common stock may be volatile;
oIf we issue additional shares of our capital stock, our stockholders will experience dilution in their respective percentage ownership in the company;
oA large portion of our common stock is controlled by a small number of stockholders and as a result, these stockholders are able to influence and ultimately control the outcome of stockholder votes on various matters;
oWe are likely to remain subject to “penny stock” regulations and as a consequence there are additional sales practice requirements and additional warnings issued by the SEC;
oThere is substantial doubt about our ability to continue as a going concern;
oWe do not anticipate paying cash dividends on our common stock;
oRestrictions on the Use of Rule 144 by Shell Companies or Former Shell Companies.
Risks Related to our Business and our Industry
The commercial success of our products depends upon the degree of their market acceptance among the medical community. If our products do not attain market acceptance among the medical community, our operations and profitability would be adversely affected.
The commercial success of our products depends upon the degree of market acceptance they achieve within the medical community, particularly among physicians and hospital administrators. Physicians may not prescribe or recommend our products to patients and procurement departments of hospitals may not purchase our products if physicians or hospital pharmacists do not find our products attractive. The acceptance and use of our products among the medical community will depend upon a number of factors, including:
●perception of physicians, patients and others in the medical community as to the safety and effectiveness of our products;
●the prevalence and severity of any side effects;
●the pharmacological benefit of our products relative to competing products and products under development;
●the efficacy and potential advantages of our products relative to competing products and products under development;
●the relative convenience and ease of administration of our products;
●the methods by which our pharmaceutical products may be delivered to patients;
●the effectiveness of our education, marketing and distribution efforts and those of our distributors;
●publicity concerning our products or competing products and treatments; and
●the price of our products and competing products.
If we fail to meet standards pursuant to the newly revised Drug Administration Law, the production at certain of our production lines will be suspended and our operations and profitability would be adversely affected.
All of our existing production lines have met the GMP Standards which became effective as of March 1, 2011. On December 1, 2019 the newly revised Drug Administration Law (the “New Law”) came into effect. One of the major amendments of the New Law is the cancellation of GMP certification. The New Law eliminated the requirement that drug administration authorities shall assess drug manufacture enterprises and drug trading enterprises, and issue assessment certificates. Instead, it requires that drug manufacturing enterprises and drug trading enterprises establish and improve the quality management systems of manufacture and trade of drugs, and ensure that the process of manufacturing and trading of drugs always meets all legal requirements. This means a stricter form of supervision is implemented comparing to the prior GMP certificates system.
While all of our existing product lines are in full compliance with the GMP standards issued in 2011, in the event we fail to continually meet the requirements of the GMP and receive the deficiency feedback from any pilot inspection under the New Law, the production on such production line(s) could be suspended and our operations and profitability could be adversely affected.
We may be subject from time to time to product recalls initiated by us or by the NMPA. Product recalls could impose significant costs on us and adversely affect our ability to generate revenue.
In our business, we must comply with a variety of product safety and product testing regulations. In particular, our products are subject to, among other statutes and regulations, those issued by the NMPA. If the NMPA issues any notices to cease the production, sale and use of any of our products, we must comply with such requirements. As a result, we may incur significant costs in complying with cessation requirements, and our financial results could be materially and adversely affected. Furthermore, concerns about potential liability or potential future changes in product safety regulations may lead us to voluntarily recall or otherwise discontinue selling selected products, which could materially and adversely affect our results of operations.
In March 2013, NMPA issued a nationwide notice (the “NMPA Notice”) for the cessation of the production, sale and use of Buflomedil effective immediately. The NMPA Notice was a result of the reevaluation done by the NMPA based on the indications from the recent Chinese and international research materials, which found that the risks of side effects to the nervous system and the cardiovascular system from Buflomedil have surpassed its clinical treatment benefits. The NMPA Notice was applicable to all the manufacturers and distributors in China who are in the business of the production and sale of Buflomedil related products. As a result, we no longer produce Buflomedil after 2013.
Recalls may also harm our reputation, increase our costs and reduce our net sales. Governments and regulatory agencies in the markets where we manufacture and sell products may enact additional regulations relating to product safety and consumer protection in the future or take other actions that may adversely impact our business. The NMPA has the authority to revoke drug approvals previously granted and remove previously approved products from the market for various reasons.
If we fail to develop new products with high profit margins and our high-profit-margin products are replaced by competitors’ products, then our gross and net profits margins will be adversely affected.
We had gross profit margins of 17.0% for the year ended December 31, 2020, compared to gross profit margins of 13.6% for the year ended December 31, 2019. The pharmaceutical market in the PRC remains very competitive, and there may be pressure to reduce sale prices of products without a corresponding decrease in the cost of sold products. To the extent that we fail to develop new products with high profit margins and our high-profit-margin products are replaced by our competitors’ products, our gross profit margins and net profit margins will be adversely affected. In addition, three of our products are included in the National Essential Drug List (the “EDL”), which are subject to strict governmental price controls. Therefore, our gross profit margin and net profit margins could be adversely affected notwithstanding any increase in our revenues.
Our products face substantial competition. Other companies may discover, develop, acquire or commercialize products earlier or more successfully than we do.
We operate in a highly competitive environment. Our products compete with other products or treatments for diseases that treat similar medical conditions. Many of our products may compete against products that have lower prices, superior performance, greater ease of administration or other advantages. We would face enhanced competition if competitive products are added to the National Medical Insurance Program. Our inability to compete effectively could reduce sales or margins, which could have a material adverse effect on our results of our operations.
Some of our competitors are actively engaging in research and development in areas in which we have products or in which we are developing new product or new indications for existing products. In the future, we expect that our products will compete with new drugs currently in development, drugs approved for other indications that may be approved for the same indications as those of our products and drugs approved for other indications that are used off-label. If alternatives to our products are dispensed or prescribed to patients, the volume of our competing products sold may decline or we may be required to lower the prices of our competing products to remain competitive, either of which could negatively impact our sales. In addition, an increasing number of foreign pharmaceutical companies have introduced their pharmaceutical products into the Chinese market. Competitive products introduced by these companies can also negatively impact our sales and results of operations.
Large Chinese state-owned and privately owned pharmaceutical companies and foreign-invested or foreign pharmaceutical companies may have greater clinical, research, regulatory, manufacturing, marketing, financial and human resources than we do. In addition, some of our competitors may have technical or competitive advantages over us with respect to the development of technologies and processes. These resources may make it difficult for us to compete with them to successfully discover, develop and market new products and for our current products to compete with new products or new product indications that these competitors may bring to market. There may also be significant consolidation in the pharmaceutical industry among our competitors. Alliances may develop among competitors, and these alliances may rapidly acquire significant market share.
Furthermore, in order to gain market share in China, competitors may significantly increase their advertising expenditures and promotional activities or even engage in irrational or predatory pricing behavior. In addition, our competitors may engage in inappropriate competition or illegal acts, such as bribery. Third parties may actively engage in activities designed to undermine our brand name and product quality or to influence customer confidence in our products. Increased competition may result in price reductions, reduced margins and loss of market share, any of which could materially adversely affect our profit margins. We may not be able to compete effectively against current and future competitors.
Most of our products are off-patent branded generics that can be manufactured and sold by other pharmaceutical manufacturers in the PRC which may increase the competition we face and reduce our business profitability.
Most of our products are off-patent branded generic pharmaceuticals and are not protected by intellectual property rights. As a result, other pharmaceutical companies may sell equivalent products at a lower cost, and this might result in a commensurate loss in sales of our branded generic products or require us to lower our prices to compete. If other pharmaceutical companies sell pharmaceutical products that are similar to our unprotected products, we may face additional competition and our business and profitability may be adversely affected.
Our business depends in part on our well-known Helpson brand name, and if we are not able to maintain and enhance our brand recognition to maintain our competitive advantage, our reputation, business and operating results may be harmed.
We believe that market awareness of our Helpson brand has contributed significantly to the success of our business. We also believe that maintaining and enhancing the Helpson brand is critical to maintaining our competitive advantage. Although our sales and marketing staff will continue to further promote our brand to remain competitive, we may not be successful. If we are unable to further enhance our brand recognition and increase awareness of our products, or if we are compelled to incur excessive marketing and promotion expenses in order to maintain our brand awareness, our business and results of operations may be materially and adversely affected. Furthermore, our sales and results of operations could be adversely affected if the Helpson brand or our reputation is impaired by recalls or negative publicity for one of our branded products, or certain actions taken by our distributors, competitors, third-party marketing firms or relevant regulatory authorities.
Reimbursement may not be available for our products, which could diminish our sales or affect our ability to sell our products profitably.
Market acceptance and sales of our products also depend on a large extent on the reimbursement policies of the PRC government. The Ministry of Labor and Social Security of the PRC or provincial or local labor and social security authorities, together with other government authorities, review the inclusion or removal of drugs from the national medical insurance catalog or provincial or local medical insurance catalogs for the National Medical Insurance Program every other year, and catalogs under which a drug will be classified affects the amounts reimbursable to program participants for their purchases of those medicines. These determinations are made based on a number of factors, including price and efficacy. Generally, there are two catalogs, the National Insurance Catalogue (“NIC”) and the EDL on which a product can be included. The products selected for the EDL generally are selected from the NIC. A consumer can be reimbursed for the full cost of a medicine on the EDL and can be reimbursed for 80% to 90% of the cost of a medicine listed on the NIC. Our Cefalexin, Clarithromycin and Omeprazole products are currently included in the EDL. If government authorities decide to remove these products from the medicine catalogs, such removal may reduce the affordability of our products and change the public perception regarding our products, which, in turn, would adversely affect the sales of these products and reduce our net revenue. Furthermore, if we are unable to obtain approval from the relevant government authorities to include our new products in the national, provincial or local medicine catalogs, sales of our new products maybe materially and adversely affected.
The growth and success of our business depend on our ability to successfully market our principal products to hospitals and their selection in tender processes used by hospitals for medicine purchases.
Our future growth and success significantly depend on our ability to successfully market our principal products to hospitals as prescription medicines. Approximately 80% of the end-customers of our products are hospitals. Hospitals may make bulk purchases of a medicine included in the national and provincial medicine catalogs only if that medicine is selected under a government-administered tender process. A hospital’s interest in a particular medicine is evidenced by:
●the inclusion of this medicine on the hospital’s formulary, which establishes the scope of medicines physicians at this hospital may prescribe to their patients, and
●the willingness of physicians at a hospital to prescribe this medicine to their patients.
We believe effective marketing efforts are critical in ensuring that hospitals and physicians are interested in purchasing our products. If our marketing efforts are not effective, hospital administrators may not want to include our products in their formularies or may remove them from their formularies, or physicians may not be interested in prescribing our products to their patients. As a result, we may find it difficult to maintain the existing level of sales of our products, and our revenues and profitability may decline.
Our future research and development projects may not be successful.
The successful development of pharmaceutical products can be influenced by many factors. Products that appear to be promising in their early phases of research and development may fail to be commercially viable for various reasons, such as failing to obtain the necessary regulatory approvals. Additionally, the research and development process for new products for which we may obtain an approval certificate is long. The process of conducting basic research and various stages of tests and trials of a new product before obtaining an approval certificate and commercializing the product may require ten years or longer. A few of our product candidates are in the early stages of pre-clinical study and clinical trials and we must conduct a significant number of additional clinical trials before we can seek the regulatory approvals necessary to begin commercial production and sales of these products. We cannot guarantee that our future research and development projects will be successful or completed within their anticipated time frames or budgets, or that we will receive the necessary approvals from the relevant authorities for the production of these products, or that these newly-developed products will achieve commercial success.
Our competitors may obtain approval for a competitive product before the product we are developing is approved. If this occurs, we may be precluded from getting approval until the competitor’s monitoring period expires and realize little to no benefit from our research and development investment.
Even if such products can be successfully commercialized, they may not achieve the level of market acceptance that we expect. Additionally, the pharmaceutical industry is characterized by rapid changes in technology, constant enhancements of industry know-how and the frequent emergence of new products. Future technological improvements and continual product developments in the pharmaceutical market may render our existing products obsolete or affect their viability and competitiveness. Therefore, our future success will largely depend on our development capability, including our ability to improve our existing products, diversify our product range and develop new and competitively-priced products that meet the requirements of the changing market. Should we fail to respond to these frequent technological advances by failing to improve our existing products, develop new products in a timely manner, or have these products reach a desirable level of market acceptance, our business and profitability will be materially and adversely affected.
We cooperate with research institutions and universities in the PRC for the research and development of certain new products and any failure of such research institutions to meet our timing and quality standards may pose impairment loss on our financial results and our failure to continue such collaborative arrangement or enter into such new arrangements could adversely affect our ability to develop new pharmaceuticals and our overall business prospects.
Our business strategy includes collaborating with third parties for the research and development of new products. We have maintained long-term cooperative relationships with a number of research institutions and universities in the PRC. These research institutions and universities used to collaborate with us in a number of research projects and certain of our products with approval certificates were developed by such research institutions. Any failure of such research institutions to meet the required quality standards and timetables set forth in their research agreements with us, or our inability to enter into additional research agreements with these research institutions on terms acceptable to us in the future, may have an adverse effect on our ability to develop new medicines and on our business prospects.
While the Company may resume the development of these formulas in the future if sufficient funding and other favorable conditions arise, we cannot guarantee that we will be able to enter into agreements with new parties on terms acceptable to us. Our inability to enter into such agreements or our failure to maintain such arrangements could limit the number of new products that we develop and ultimately decrease our sources of future revenue.
We may not be able to obtain regulatory approval for any of the new products and failure to obtain these approvals could materially harm our business.
All new medicines must be approved by the NMPA before they can be marketed and sold in the PRC. The NMPA requires successful completion of clinical trials and demonstrated manufacturing capability before it grants approval. It often takes a number of years before a medicine can be ultimately approved by the NMPA. In addition, the NMPA and other regulatory authorities may apply new standards for safety, manufacturing, packaging, and distribution of future product candidates.
Complying with such standards may be time-consuming and expensive and could result in delays in obtaining NMPA approval for our future product candidates, or possibly preclude us from obtaining NMPA approval altogether. For example, due to the enhanced criteria introduced during the implementation process of the trial of one of our products in the dried powder injectable and granule production lines in our old plant, the clinical trials lasted longer than originally expected. Furthermore, our future products may not be effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining regulatory approval and prevent or limit their commercial use. The NMPA and other regulatory authorities may not approve the products that we develop and even if we do obtain regulatory approvals, such regulatory approvals may be subject to limitations on the indicated uses for which we may market a product, which may limit the size of the market for such product.
New product development in the pharmaceutical industry is time-consuming and costly and has a low rate of successful commercialization.
Our success depends in part on our ability to enhance our existing products and to develop new products. The development process for pharmaceutical products is complex and uncertain, as well as time-consuming and costly. Relatively few research and development programs produce a commercial product. A product candidate that appears promising in the early phases of development may fail to reach the market for a number of reasons, such as:
● the failure to demonstrate safety and efficacy in preclinical and clinical trials;
● the failure to obtain approvals for intended use from relevant regulatory bodies, such as the NMPA;
● our inability to manufacture and commercialize sufficient quantities of the product economically; and
● proprietary rights, such as patent rights, held by others to our product candidates and their refusal to sell or license such rights to us on reasonable terms, or at all.
Delays in any part of the development process or our inability to obtain regulatory approval of our products could adversely affect our operating results by restricting or delaying our introduction of new products. Even if we successfully commercialize new products, these products may compete with our mature products and may result in a reduction in the sales volume of our mature product or vice versa. Failure to develop, obtain necessary regulatory clearances or approvals for or successfully commercialize or market potential new products or technologies could have a material adverse effect on our financial condition and results of operations.
We may not be able to successfully identify and acquire new products or businesses.
In addition to our own product development efforts, our growth strategy also relies on our acquisitions of new product candidates, products or businesses from third parties. Any future growth through acquisitions will be dependent upon the continued availability of suitable acquisition candidates at favorable prices and favorable terms and conditions. Even if such opportunities present themselves, we may not be able to successfully identify them. Moreover, other companies, many of which may have substantially greater financial, marketing and sales resources, are competing with us for the right to acquire such product candidates, products or businesses.
We rely on distributors for all of our revenues and failure to maintain relationships with our distributors or to otherwise expand our distribution network would materially and adversely affect our business.
We sell our products exclusively to pharmaceutical distributors in the PRC and rely on distributors for all of our revenues. We have business relationships with over 1,000 distributors in the PRC. For the year ended December 31, 2020, no customer accounted for more than 10.0% of sales, and three customers accounted for 52.0%, 11.2%, and 10.2% of accounts receivable. In line with industry practices in the PRC, we enter into written sales agreements with our distributors. However, such sales agreements are not in substance equivalent to a typical distribution agreement in the United States. Each sales agreement is more in the form of a sales order and specifies one or several purchases of one or more products without any continuing obligation to purchase any additional amount of products. In the event certain distributors choose not to continue their relationship with us after completing their existing sales agreements, they can do so without breaching any contract or agreement, our financial results could be adversely affected if we cannot find the substantially similar distributors in time under such circumstances. In addition, some of our distributors may sell products that compete with our products. We compete for desired distributors with other pharmaceutical manufacturers, many of which may have higher visibility, greater name recognition, financial resources, and broader product selection than we do. Consequently, maintaining relationships with existing distributors and replacing distributors may be difficult and time-consuming. Any disruption of our distribution network, including our failure to renew our existing distribution agreements with our desired distributors, could negatively affect our ability to effectively sell our products and would materially and adversely affect our business, financial condition and results of operations.
We rely on a limited number of distributors for the majority of sales of our products.
We rely on a limited number of distributors for most of our net revenue. Our top five distributors in the aggregate accounted for 16% and 14% of our net revenues in 2020 and 2019, respectively. We expect that a relatively small number of distributors will continue to account for a major portion of our net revenue in the near future. Our dependence on a few distributors may expose us to the risk of substantial losses if a single large distributor stops purchasing our products, purchases lower quantities of our products or goes out of business and we cannot find substitute distributors on equivalent terms. If any of our large distributors reduces the quantity of the products they purchase from us or stops purchasing from us, our net revenue would be materially and adversely affected.
Our operations may be affected if we could not pass the Consistency Evaluation requirement issued by the State Council for any of our current existing products.
Generic drugs refer to drugs with the same active ingredient, dosage form, delivery channel and therapeutic effects compared to the original drugs. The “Consistency Evaluation” requires currently marketed generic products to prove their consistency in term of quality and therapeutic effect, and substitutability during clinical trials with original drug. The Consistency Evaluation could enhance the development of pharmaceutical industry, ensure drug safety and effectiveness, promote the upgrading and restructuring the pharmaceutical industry, and improve international competitiveness. Both Relevant Matters Related to the Implementation of the Opinions of the General Office of the State Council on the Consistent Evaluation of the Quality and Efficacy of Generic Drugs (No. 106 of 2016) issued on 26 May 2016, and Announcement of the General Administration on the Consistency Evaluation of the Quality and Efficacy of Generic Drugs (No. 100 of 2017) issued on August 28, 2017 require that if a drug has more than 3 manufacturers passed the consistency evaluation, then the drug manufacturers without consistency evaluation valid status will have no access to participate in the drug Centralized Procurement. NMPA issued an official document on The Implementation of the Evaluation of the Quality and Efficacy of Chemical Injection Generics on May 14, 2020, requiring consistent evaluation for generics of pharmaceutical injections that are already on the market. If we fail to complete the consistency evaluations for our generic drugs per the government’s requirements, our business and operation will be negatively impacted.
We face risks related to health pandemics that could impact our sales and operating results.
Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. These could include disruptions or restrictions on our ability to travel, to transport raw materials by our suppliers to us or to distribute our products to our customers. There were temporary closures of our facilities during the period from February to March 2020 and returned to normal in the second quarter of 2020 due to the outbreak of the Covid-19 pandemic.
Any disruption or delay of our operations and those of our suppliers or customers may adversely impact our sales and operating results. We observed that almost all Chinese enterprises, including us, have experienced various degrees of operation suspension, staff quarantine, and disruption of transportation and logistics, and interrupted connection with upstream and downstream entities in 2020 due to the Covid-19 pandemic. In addition, a significant outbreak of contagious diseases in the human population 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 affect demand for our products and significantly impact our operating results.
Our operations may be affected if we could not obtain raw materials from our current key suppliers on acceptable terms.
We need a supply of a wide variety of raw materials to manufacture our products. Currently, we rely on numerous suppliers in the PRC and overseas to deliver our required raw materials. We have at least three principal suppliers for each of our most critical raw materials. For the year ended December 31, 2020, three suppliers accounted for 20.7%, 17.7%, and 13.5% of raw material purchases and the year ended December 31, 2019, purchases from three suppliers accounted for 22.3%, 20.6%, and 5.8% our raw material purchases.
Historically, we have not had difficulty obtaining raw materials from suppliers. However, besides the impact that may be caused by the coronavirus outbreak discussed above, we cannot predict the impact on our suppliers of the current economic environment and other developments in their respective businesses, either. Insolvency, financial difficulties or other factors may result in our suppliers not being able to fulfill the terms of their agreements with us. Furthermore, such factors may render suppliers unwilling to extend contracts that provide favorable terms to us or may force them to seek to renegotiate existing contracts. Although we believe we have alternative sources of supply for the raw materials used in our business, termination of our relationships with any of our key suppliers could have a material adverse effect on our business, financial condition or results of operations in the unlikely event that we are unable to obtain adequate raw materials from other sources in a timely manner or at all.
We may not be able to effectively manage our employees and distribution network, and our reputation, business, prospects and brand may be materially and adversely affected by actions taken by our distributors and third party marketing firms.
We have limited ability to manage the activities of our distributors and third-party marketing firms that we contract to promote our products and brand name, which are independent from us. Our distributors and third-party marketing firms could take one or more of the following actions, any of which could have a material adverse effect on our business, prospects and brand:
●sell our products outside their designated territory, possibly in violation of the exclusive distribution rights of other distributors;
●fail to adequately promote our products;
●promote competing products in lieu of our products; or
●violate the anti-corruption laws of China, the United States or other countries.
Additionally, although our company policies prohibit our employees from making improper payments to hospitals or otherwise engaging in improper activities to influence the procurement decisions of hospitals, we may not be able to effectively manage our employees, as the compensation of our sales and marketing personnel is partially linked to their sales performance. As a result, we cannot assure you that our employees will not violate the anticorruption laws of the PRC, the United States and other countries. Such violations could have a material adverse effect on our reputation, business, prospects and brand.
Failure to adequately manage our employees, distribution network or third-party marketing firms, or their non-compliance with employment, distribution or marketing agreements could harm our corporate image among hospitals and end users of our products and disrupt our sales, resulting in a failure to meet our sales goals. Furthermore, we could be liable for actions taken by our employees, distributors or third-party marketing firms, including any violations of applicable law in connection with the marketing or sale of our products, including China’s anticorruption laws and the Foreign Corrupt Practices Act of the United States, or the FCPA. In particular, if our employees, distributors or third-party marketing firms make any payments that are forbidden under the FCPA, we could be subject to civil and criminal penalties imposed by the U.S. government.
Recently, the PRC government has increased its anti-corruption measures. In the pharmaceutical industry, corrupt practices include, among others, acceptance of kickbacks, bribes or other illegal gains or benefits by hospitals and medical practitioners from pharmaceutical manufacturers and distributors in connection with the prescription of certain pharmaceuticals. Our employees, affiliates, distributors or third-party marketing firms may violate these laws or otherwise engage in illegal practices with respect to their sales or marking of our products or other activities involving our products. If our employees, affiliates, distributors or third-party marketing firms violate these laws, we could be required to pay damages or fines, which could materially and adversely affect our financial condition and results of operations. In addition, PRC laws regarding the types of payments to promote or sell our products that are impermissible are not always clear. As a result, we, our employees, affiliates, our distributors or third-party marketing firms could make certain payments in connection with the promotion or sale of our products or other activities involving our products which at the time could be reasonably determined to be legal but are later deemed impermissible by the PRC government. Furthermore, our brand and reputation, our sales activities or the price of our common stock could be adversely affected if we become the target of any negative publicity as a result of actions taken by our employees, affiliates, distributors or third-party marketing firms.
We have limited insurance coverage and may incur losses resulting from product liability claims, business interruptions or claims that could be covered by D&O Insurance.
The nature of our business exposes us to the risk of product liability claims that is inherent in the research and development, manufacturing and marketing of pharmaceutical products. Using product candidates in clinical trials also exposes us to product liability claims. These risks are greater for our products that receive regulatory approval for commercial sale. Even if a product is approved for commercial use by an appropriate governmental agency, there can be no assurance that users will not claim effects other than those intended resulted from the use of our products. While no material claim for personal injury resulting from allegedly defective products has been brought against us to date, a substantial claim or a substantial number of claims, if successful, could have a material adverse impact on our business, financial condition and results of operations. Such lawsuits may divert the attention of our management from our business strategies, may be costly to defend and may negatively impact our reputation and our Helpson brand’s reputation, and may harm the sales of our other branded products. In addition, product liability insurance for pharmaceutical products is not available in the PRC. In the event of allegations that any of our products are harmful, we may experience reduced consumer demand for our products or our products may be recalled from the market. We may also be forced to defend lawsuits and, if unsuccessful, to pay a substantial amount in damages, legal fees, and other related expenses. In addition, business interruption insurance available in the PRC offers limited coverage compared to that offered in many other countries. We do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources. Lastly, we currently do not have directors and officers insurance. In the event we or any of our directors or officers are sued under any proceedings or actions that could be covered by a standard D&O insurance, we may incur substantial costs and expenses to defend such case.
Our future liquidity needs are uncertain and we may need to raise additional funds in the future.
Based on our current operating plans, we expect our existing resources to be sufficient to fund our existing operations for at least 12 months. However, we may need to raise additional funds to expand our operations. In addition, we may need to raise additional funds if our expenditures exceed our current expectations. This could occur for a number of reasons, including:
●we decide to devote significant amount of financial resources to the development of products that we believe to have significant commercialization potential;
● we decide to acquire or license rights to additional product candidates or new technologies;
●some of our product candidates fail in clinical trials or pre-clinical studies or prove not to be as commercially promising as we expected, and we are forced to develop or acquire additional product candidates;
●Some of our product candidates require more extensive clinical or pre-clinical testing or clinical trials for these product candidates take longer to complete than we currently expect; or
●we decide or are required to conduct more high-throughput screening than expected against current or additional disease targets to develop additional product candidates.
Our ability to raise additional funds in the future is subject to a variety of uncertainties, including:
●our future financial condition, results of operations and cash flows;
●general market conditions for capital-raising activities by pharmaceutical companies; and
●economic, political and other conditions in China and elsewhere.
We cannot assure you that our revenues will be sufficient to meet our operational needs and capital requirements. If we need to obtain external financing, we cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Our future liquidity needs and other business reasons could require us to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to our stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations.
The failure to manage growth effectively could have an adverse effect on our business, financial condition and results of our operations.
The rapid market growth of our pharmaceutical products may require us to expand our employee base for managerial, operational, financial and other purposes. As of December 31, 2020, we had 248 employees. Our future development will impose significant responsibilities upon the members of management to identify, recruit, maintain, integrate and motivate new employees. Aside from the increased difficulties in the management of human resources, we may also encounter working capital issues, as we need increased liquidity to finance the purchases of raw materials and supplies, drug formulas for new products, investment in research and development, acquisition of new businesses and technologies, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and control. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability.
We depend upon key employees and consultants in a competitive market for skilled personnel. If we are unable to attract and retain key personnel, it could adversely affect our ability to develop and market our products.
We are highly dependent upon the principal members of our management team, especially Ms. Zhilin Li, our Chairman, President and Chief Executive Officer. The loss of Ms. Li’s services would adversely affect our ability to develop and market our products. We also depend in part on the continued services of our key scientific personnel and our ability to identify, hire and retain additional personnel, including marketing and sales staff. We face intense competition for qualified personnel, and the existence of noncompetition agreements between prospective employees and their former employers may prevent us from hiring those individuals or subject us to suit from their former employers. While we attempt to provide competitive compensation packages to attract and retain key personnel, many of our competitors are likely to have greater resources and more experience than we have, making it difficult for us to compete successfully for key personnel.
Certain of our employees and consultants were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors, or at universities or other research institutions. Although there is currently no claim against us, we may be subject to claims that these employees or consultants have, inadvertently or otherwise, used or disclosed trade secrets or other proprietary information of their former employers. It may be necessary to for us to litigate and defend against these claims. Even if we successfully defend against these claims, litigation could result in substantial costs and be a distraction to our management. If we fail to defend such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.
Power shortages, natural disasters, terrorist acts or other calamities could disrupt our production and have a material adverse effect on our business, financial position and results of operations.
All of our products are produced at our manufacturing facility in Hainan, China. A significant disruption at that facility, even on a short-term basis, could impair our ability to timely produce and ship products, which could have a material adverse effect on our business, financial position and results of operations. Our manufacturing operations are vulnerable to interruption and damage from natural and other types of disasters, including earthquake, fire, floods, environmental accidents, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously impaired. For example, a once-in-forty-year 16 grade super typhoon Rammasun hit Haikou on July 18, 2014, which caused us approximately $2.3 million (RMB14.2 million) in losses. Part of a warehouse was flooded, some damage was caused to our new facility, and the water and electricity supply was suspended for several days, causing a brief halt to our production activities and a delay in our obtaining GMP certification.
In addition, we do not maintain any insurance other than property insurance for some of our buildings, vehicles and equipment. Accordingly, unexpected business interruptions resulting from disasters could disrupt our operations and thereby result in substantial costs and diversion of resources. Our production process requires a continuous supply of electricity. We have encountered power shortages historically due to restricted power supply to industrial users during summers when the usage of electricity is high and supply is limited or as a result of damage to the electricity supply network. Because the duration of those power shortages was brief, they had no material impact on our operations. Longer interruptions of electricity supply could result in lengthy production shutdowns, increased costs associated with restarting production and the loss of production in progress. Any major suspension or termination of electricity or other unexpected business interruptions could have a material adverse impact on our business, financial condition and results of operations.
We cannot guarantee the protection of our intellectual property rights, and if infringement or counterfeiting of our intellectual property rights occurs, then our reputation and business may be adversely affected.
To protect the brand names of our products, we have registered and applied for registration of certain of our trademarks in the PRC. Currently eight of the 19 pharmaceutical products we manufacture are marketed under a brand registered as a trademark in China. We also purchased a pharmaceutical compound from a third party that we are seeking to develop into a further product. To date, we have not experienced any infringements of our trademarks for sales of pharmaceutical products or our exclusive patent license, and we are not aware of any infringement of our intellectual property rights. However, there is no guarantee that there will not be any infringements of our brand name or other registered trademarks or counterfeiting of our products in the future. There is no guarantee that there will not be any third-party infringement of our patents. Should any such infringement or counterfeiting occur, our reputation and business may be adversely affected. We may also incur significant expenses and substantial amounts of time and effort to protect our intellectual property rights in the future. Such diversion of our resources may adversely affect our existing business and future expansion plans.
Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the intellectual property rights of others. However, because the validity, enforceability and scope of protection of intellectual property rights in the PRC are uncertain and still evolving, we may not be successful in prosecuting these cases. In addition, any litigation or proceeding or other efforts to protect our intellectual property rights could result in substantial costs and diversion of our resources and could seriously harm our business and operating results. Furthermore, the degree of future protection of our proprietary rights is uncertain and may not adequately protect our rights or permit us to gain or keep our competitive advantage. If we are unable to protect our trade names, trade secrets and other propriety information from infringement, our business, financial condition and results of operations may be materially and adversely affected.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the PRC government could have a material and adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position.
We conduct substantially all of our business and have historically derived all of our revenues in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
●the degree of government involvement;
●the level of development;
●the growth rate;
●the control of foreign exchange;
●access to financing; and
●the allocation of resources.
While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese economy has also experienced certain adverse effects due to the recent global financial crisis. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us, and by government policies or guidance aimed at curtailing the perceived over-capacity of certain industry sectors, such as pharmaceutical companies. The Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, which could in turn reduce the demand for our products and materially and adversely affect our operating results and financial condition.
China’s economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business.
The Chinese government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Any adverse change in the economic conditions or government policies in China could have a material and adverse effect on overall economic growth and the level of investments in health industries in China, which in turn could lead to a reduction in demand for our products and consequently have a material and adverse effect on our business.
The PRC legal system has inherent uncertainties that could limit the legal protections available to us.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing commercial matters. The overall effect of legislation enacted over the past 20 years has significantly enhanced the protections afforded to foreign-invested enterprises in China. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors.
The practical effect of the PRC legal system on our business operations in China can be viewed as two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full benefit of corporate articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance that are not qualitatively different from the corporation laws found in the United States. Similarly, PRC accounting laws mandate accounting practices that may not be consistent with the U.S. generally accepted accounting principles. PRC accounting laws require that an annual “statutory audit” be performed in accordance with PRC accounting standards and that the account books of a foreign invested enterprise be maintained in accordance with PRC accounting laws. Article 14 of the PRC Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities. If a foreign-invested enterprise refuses to keep account books in China, the financial and tax authorities may impose a fine on it, and the industry and commerce administration authority may order it to suspend operations or may revoke its business license.
Second, while the enforcement of substantive rights may be less clear than United States procedures, foreign-invested enterprises and foreign wholly-owned enterprises are PRC registered companies that enjoy the same status as other PRC registered companies in business-to-business dispute resolutions. The PRC legal infrastructure, however, is significantly different in operation from its United States counterpart, and may present a significant impediment to the operation of a foreign invested enterprise.
PRC economic reform policies or nationalization could result in a total investment loss in our common stock.
Since 1979, the PRC government has been reforming its economic policies. Because many reforms are unprecedented or experimental, they are expected to be refined and improved over time. Other political, economic and social factors, such as political changes, changes in the economic growth rates, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refinement and readjustment process may negatively affect our operations.
Although the PRC government owns the majority of productive assets in China, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no guarantees that:
●We will be able to capitalize on economic reforms;
●The PRC government will continue its pursuit of economic reform policies;
● The economic policies, even if pursued, will be successful;
● Economic policies will not be significantly altered from time to time; or
● Business operations in China will not become subject to the risk of nationalization.
Over the last few years, China’s economy has registered high growth rates. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included restrictions on the availability of domestic credit, reducing the purchasing capability of some of its customers, and limited recentralization of the approval process for purchases of certain foreign products. These austere measures alone may not succeed in slowing down the economy’s excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The PRC government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets. These measures may adversely affect our operations.
There is no guarantee that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China’s political, economic, and social conditions and by changes in policies of the PRC government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC against our company or our management based on U.S. or other foreign laws.
Our operating subsidiary, Helpson, is incorporated under the laws of the PRC and substantially all of our assets are located in the PRC. Additionally, substantially all of our directors, executive officers and managers reside within the PRC, and substantially all assets of these persons are located within the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside the PRC upon certain of our directors, executive officers or managers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom, Japan or many other countries. As a result, recognition and enforcement in the PRC of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter may be difficult or impossible. Furthermore, an original action may be brought in the PRC against us, our directors, executive officers or managers only if the actions are not required to be arbitrated by PRC law under Helpson’s articles of association, and only if the facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a PRC court may impose civil liability, including monetary damages.
As a Foreign Invested Company in China, Helpson’s ownership structure may be impacted by the foreign investment regulation and its measures in China.
On June 30, 2019, Catalogue of Encouraging Foreign Investment Industries (2019 Edition) (the “2019 Encouraged Catalogue”) and Special Administrative Measures for Foreign Investment Access (Negative List) (2019 Edition) (the “2019 Negative List”) were jointly released by China’s Ministry of Commerce and the National Development and Reform Commission and became effective on July 30, 2019.
In accordance with Decree No. 723 of the State Council of the People's Republic of China issued on December 26, 2019, the Regulations on the Implementation of the Foreign Investment Law of the People's Republic of China came into force on January 1, 2020. On June 23, 2020, the National Development and Reform Commission of China and the Ministry of Commerce issued Decrees No. 32, the Special Measures for the Administration of Foreign Investment Access (Negative List) (2020 Edition), and and No. 33, the Special Management Measures for Foreign Investment Access in Free Trade Pilot Zones (Negative List) (2020 Edition), effective July 23, 2020. =. As per these policies, the national negative list of foreign investment access was reduced from 40 to 33, and the negative list of foreign investment access in the FTZ was reduced from 37 to 30. On December 28, 2020, the National Development and Reform Commission and the Ministry of Commerce publicly released the Directory of Industries to Encourage Foreign Investment (Encouraged Catalogue) (2020 Edition). Industries listed in the 2020 Encouraged Catalogue are the encouraged industries. On the other hand, industries listed in the 2020 Negative List are subject to special management measures. For example, establishment of wholly foreign-owned enterprises is generally allowed in industries outside of the 2020 Negative List. Also, foreign investors are not allowed to invest in industries that are expressly prohibited in the 2020 Negative List. The industries that are not expressly prohibited in the Negative List are still subject to government approvals and certain special requirements.
The majority of pharmaceutical manufacturing industry including the segments under which the Company conducts its business is not included in the 2020 Negative List. Helpson manufactures and markets generic and branded pharmaceutical products as well as biochemical products primarily to hospitals and private retailers located throughout the PRC. The Company believes Helpson’s business is not subject to any ownership restrictions prescribed under the Catalogue. Onny acquired 100% of the ownership in Helpson on May 25, 2005, by entering into an Equity Transfer Agreement with Helpson’s three former shareholders. The transaction was approved by the Commercial Bureau of Hainan Province on June 12, 2005 and Helpson received the Certificate of Approval for 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. However, in the event the 2020 Negative List is amended in the future to include any of the business Helpson is operating, our ownership structure could be subject to change to the extent our structure is not given any “grandfather” protection.
Because we receive substantially all of our revenue in Renminbi, which currently is not a freely convertible currency, and the PRC government controls the currency conversion and the fluctuation of the Renminbi, we are subject to changes in the PRC’s political and economic decisions.
We receive substantially all of our revenues in Renminbi, which currently is not a freely-convertible currency. The PRC government may, at its discretion, restrict access in the future to foreign currencies for current account transactions. Any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies, after providing valid commercial documents, at those banks authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items.
We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange transactions.
Fluctuation in the value of the Renminbi may have a material and adverse effect on your investment. The change in value of the Renminbi against the U.S. dollar is affected by, among other things, changes in PRC’s political and economic conditions. From 1995 until July 2005, the People’s Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately Renminbi 8.3 per U.S. dollar. On July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of the Renminbi versus the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the current situation may last and when and how it may change again. There is significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar. Significant revaluation of the Renminbi may have a material adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from securities offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In August 2015, the PRC Government devalued its currency by approximately 3%, represented the largest yuan depreciation for 20 years. Concerns remain that China’s slowing economy, and in particular its exports, will need a stimulus that can only come from further cuts in the exchange rate.
In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. The income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss, which is recorded as a component of other comprehensive income. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all.
We are subject to the environmental protection laws of the PRC that may be costly to comply with and may adversely affect our manufacturing operations.
Our manufacturing process may produce by-products, such as effluent, gases and noise, which are harmful to the environment. We are subject to multiple laws governing environmental protection, such as “The Law on Environmental Protection in the PRC” and “The Law on Prevention of Effluent Pollution in the PRC,” as well as standards set by the relevant governmental bodies determining the classification of different wastes and proper disposal. We have properly attained a waste disposal permit for our manufacturing facility, which details the types and concentration of effluents and gases allowed for disposal. We are responsible for periodically renewing this waste disposal permit. There is no assurance that we will obtain a renewal of the waste disposal permit when the current permit expires in November 2022.
China is experiencing substantial problems with environmental pollution. Accordingly, it is likely that the national, provincial and local governmental agencies will adopt stricter pollution controls. There is no guarantee that future changes in environmental laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. Our business’s profitability may be adversely affected if additional or modified environmental control regulations are imposed upon us.
Failure to comply with PRC regulations regarding the registration requirements for employee equity incentive plans may subject our PRC citizen employees or us to fines and other legal or administrative sanctions.
On March 28, 2007, the SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Share Option Plan of Overseas-Listed Company, which were superseded by Notice from SAFE regarding Issues related to Domestic Individual Participating Offshore Public Company Equity Incentive Plan promulgated on February 15, 2012 (“SAFE #7”) or the Share Option Rule. Under the Share Option Rule, PRC citizens who are granted stock options or other employee equity incentive awards by an overseas publicly-listed company are required, through a PRC agent who may be a PRC subsidiary of such overseas publicly-listed company, to register with the SAFE and complete certain other procedures related to the share options or other employee equity incentive plans. We and our PRC citizen employees who are granted share options or other equity incentive awards under our 2010 Long-Term Incentive Plan, or PRC optionees, are subject to the Share Option Rule. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.
The enforcement of new labor contract law and its implementation rules and increase in labor costs in the PRC may adversely affect our business and our profitability.
China adopted the PRC Employment Contract Law, or the new Labor Contract Law, effective January 1, 2008 and the implementation rules effective September 18, 2008. The new Labor Contract Law and its implementation rules impose more stringent obligations on employers for, among others, entering into written employment contracts, hiring temporary employees, dismissing employees, setting compensations for dismissal and protecting certain sick or disabled employees from dismissal and setting forth detailed requirements relating to the contents of the employment contracts. The implementation of the new Labor Contract Law may increase our operating expenses, in particular our personnel expenses, as the continued success of our business depends significantly on our ability to attract and retain qualified personnel. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the new Labor Contract Law may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we receive from securities offerings to make loans or additional capital contributions to our PRC operating subsidiary.
In utilizing the proceeds we receive from a securities offering, as an offshore holding company with a PRC subsidiary, we may make loans to our PRC subsidiary, or we may make additional capital contributions to our PRC subsidiary. Any loans to our PRC subsidiary are subject to PRC regulations and approvals. For example, loans to our PRC subsidiary Helpson, which is a foreign-invested enterprise, to finance its activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange in China, or SAFE, or its local counterpart. Loans by us to domestic PRC enterprises must be approved by relevant government authorities and must also be registered with the SAFE or its local counterpart. Any capital contributions to our PRC subsidiary must be approved by the Ministry of Commerce in China or its local counterpart. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice requires that Renminbi converted from the foreign currency denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise.
In addition, SAFE strengthened its oversight over the flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to our future loans or capital contributions to our direct or indirect subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds from a securities offering and to capitalize our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and ability to fund and expand our business.
The 2006 M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
On August 8, 2006, six PRC regulatory agencies, namely, the Ministry of Commerce, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. The 2006 M&A Rule establishes additional procedures and requirements that could make some acquisitions of PRC companies by foreign entities, such as our company, more time-consuming and complex, including requirements in some instances that the approval of the Ministry of Commerce shall be required for transactions involving the shares of an offshore listed company being used as the acquisition consideration by foreign entities, including Sino-foreign joint ventures. In the future, we may grow our business in part by acquiring complementary businesses. Complying with the requirements of the 2006 M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
Our China-sourced income is subject to PRC withholding tax under the new Enterprise Income Tax Law of the PRC, and we may be subject to PRC enterprise income tax at the rate of 25% when more detailed rules or precedents are promulgated.
We are a Nevada holding company with substantially all of our operations conducted through our operating subsidiary in China. Under the new PRC Enterprise Income Tax Law, or the new EIT Law, and its implementation rules, both of which became effective on January 1, 2008, China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, is generally subject to a 10% withholding tax. The new EIT Law, however, also provides that enterprises established outside China whose “de facto management bodies” are located in China are considered “tax resident enterprises” and will generally be subject to the uniform 25% enterprise income tax rate as to their global income. Under the implementation rules, “de facto management bodies” are defined as the bodies that have, in substance, overall management control over such aspects as the production and business, personnel, accounts and properties of an enterprise. In April 2009, the PRC tax authority promulgated the Notice on Determination of Tax Resident Enterprises of Chinese-controlled Offshore Incorporated Enterprises in accordance with Their De Facto Management Bodies, or Circular 82, to clarify the criteria for determining whether the “de facto management bodies” are located within the PRC for enterprises incorporated overseas with controlling shareholders being PRC enterprises. As all of the our operational management is currently based in the PRC, and we expect them to continue to be located in China, our company may be deemed a PRC resident enterprise and therefore subject to the PRC enterprise income tax at a rate of 25% on our worldwide income, which excludes the dividends received directly from another PRC resident enterprise. Due to the lack of clear guidance on the criteria pursuant to which the PRC tax authorities will determine our tax residency under the new EIT Law, it remains unclear whether the PRC tax authorities will treat us as a PRC resident enterprise. Therefore, we are unable to confirm whether we are subject to the tax applicable to resident enterprises or non-resident enterprises under the new EIT Law. Furthermore, in connection with the new EIT Law and Tax Implementation Regulations, the Ministry of Finance and State Administration of Taxation jointly issued, on April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59, which became effective retrospectively on January 1, 2008. It is uncertain to us as to how it will be implemented and the respective tax base and the tax exposure cannot be determined reliably at this stage. In case we are required to pay the income tax on capital gains by the relevant PRC tax authorities, our financial conditions and results of operations could be adversely affected.
Dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to taxes under PRC tax laws.
Under the new EIT law and its implementation rules, to the extent that we are considered a “resident enterprise” which is “domiciled” in China, PRC income tax at the rate of 10% is applicable to dividends payable by us to investors that are “non-resident enterprises” so long as such “non-resident enterprise” investors do not have an establishment or place of business in China or, despite the existence of such establishment or place of business in China, the relevant income is not effectively connected with such establishment or place of business in China. Similarly, any gain realized on the transfer of our shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived from sources within China and we are considered a “resident enterprise” which is domiciled in China for tax purposes. Additionally, there is a possibility that the relevant PRC tax authorities may take the view that our purpose is that of a holding company, and the capital gain derived by our overseas stockholders would be deemed China-sourced income, in which case such capital gain may be subject to PRC withholding tax at the rate of up to 10%. If we are required under the new EIT law to withhold PRC income tax on our dividends payable to our foreign stockholders who are “non-resident enterprises”, or if you are required to pay PRC income tax on the transfer of our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely affected.
The strengthened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our acquisition strategy.
In connection with the new EIT Law, the Ministry of Finance and State Administration of Taxation jointly issued, on April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the State Administration of Taxation issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer, or Circular 698. Both Circular 59 and Circular 698 became effective retrospectively on January 1, 2008. By promulgating and implementing these circulars, the PRC tax authorities have strengthened their scrutiny over the direct or indirect transfer of equity interest in a PRC resident enterprise by a non-resident enterprise. For example, Circular 698 specifies that the PRC State Administration of Taxation is entitled to redefine the nature of an equity transfer where offshore vehicles are interposed by abusing corporate structures for tax-avoidance purposes and without reasonable commercial intention. We may pursue acquisitions as one of our growth strategies, and may conduct acquisitions involving complex corporate structures. We cannot be assured that the PRC tax authorities will not, at their discretion, adjust the capital gains thus causing us to incur additional acquisition costs.
Risks Related to our Common Stock
The market price for our common stock may be volatile which could result in a complete loss of your investment.
The market price for our common stock is highly volatile and subject to wide fluctuations in response to factors including the following:
●actual or anticipated fluctuations in our quarterly operating results;
●announcements of new products by us or our competitors;
●changes in financial estimates by securities analysts;
●conditions in the pharmaceutical market;
●changes in the economic performance or market valuations of other companies involved in pharmaceutical production;
● announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
●economic, regulatory and political developments;
●addition or departure of key personnel, or
● potential litigation.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We may issue additional shares of our capital stock to raise additional cash for working capital; if we issue additional shares of our capital stock, our stockholders will experience dilution in their respective percentage ownership in the company.
We may issue additional shares of our capital stock to raise additional cash for working capital. There is no anti-dilution protection or preemptive rights in connection with our common stock. Thus, the percentage ownership of existing holders of common stock may be diluted in their respective percentage ownership in us if we issue additional shares of our capital stock.
A large portion of our common stock is controlled by a small number of stockholders and as a result, these stockholders are able to influence and ultimately control the outcome of stockholder votes on various matters.
A large portion of our common stock is held by a small number of stockholders. For instance, Zhilin Li, our Chief Executive Officer, holds 26.4%, and Heung Mei Tsui, a member of our Board of Directors, holds 20.4% of our common stock, respectively, as of the date hereof. As a result, these two stockholders are able to significantly influence the outcome of stockholder votes on various matters, including the election of directors and other corporate transactions including business combinations. In addition, the occurrence of sales of a large number of shares of our common stock, or the perception that these sales could occur, may affect our stock price and could impair our ability to obtain capital through an offering of equity securities. Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity of our common stock which can in turn affect the market price of our common stock.
We are likely to remain subject to “penny stock” regulations and as a consequence there are additional sales practice requirements and additional warnings issued by the SEC.
If at any time we have net tangible assets of $5,000,000 or less and the trading price of our common stock is below $5.00 per share, the open-market trading of our common stock will be subject to the “penny stock” rules of the SEC. The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability of broker-dealers to sell the common stock and may affect a stockholder’s ability to resell the common stock.
There can be no assurance that our common stock will qualify for exemption from the “penny stock” rules. In any event, even if our common stock is exempt from such rules, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of a “penny stock” if the SEC finds that such a restriction would be in the public interest.
Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market.
We are responsible for the indemnification of our officers and directors under certain circumstances which could result in substantial expenditures, which we may be unable to recoup.
Our bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.
We have identified material weaknesses in our internal control over financial reporting, which could affect our ability to ensure timely and reliable financial reports, affect the ability of our auditors to attest to the effectiveness of our internal controls should we become an accelerated filer in the future, and weaken investors’ confidence in our financial reporting.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies in their annual reports to include a report of management on the reporting company’s disclosure controls and procedures and internal controls over financial reporting. We became subject to this requirement commencing with our fiscal year ended December 31, 2007 and a report of our management is included under Item 9A. “Controls and Procedures” of this Annual Report on Form 10-K. As set forth in such report, our management has concluded that our internal controls over financial reporting were not effective as of December 31, 2020, and there existed a material weakness in our internal control over financial reporting as of December 31, 2020.
We believe we are taking appropriate actions to remediate such material weakness; however, such measures may not be sufficient to address the material weaknesses identified or ensure that our controls and procedures are effective. We may also discover other material weaknesses in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in the implementation of such controls, could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements and affect the ability of our auditors to attest to the effectiveness of our internal control over financing reporting to the extent we become an accelerated filer in the future. In addition, substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, and our business and financial condition could be adversely affected.
There is substantial doubt about our ability to continue as a going concern.
Our auditors have indicated in their report on our financial statements for the years ended December 31, 2020 and 2019 that conditions exist that raise substantial doubt about our ability to continue as a going concern as discussed in Note 1 to the financial statements. The Company incurred recurring losses from operations, has net current liabilities and an accumulated deficit that raise substantial doubt about its ability to continue as a going concern.
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. 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.
If we are unable to generate enough cash or obtain additional sufficient funding, we would need to scale back or eliminate our business plan, reduce our operating costs and headcount, or discontinue or curtail our operations. Accordingly, our business, prospects, financial condition and results of operations could be materially and adversely affected, and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or a part of their investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We do not anticipate paying cash dividends on our common stock.
You should not rely on an investment in our common stock to provide dividend income, as we have not paid any cash dividends on our common stock and do not plan to pay any in the foreseeable future. Accordingly, investors must rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any return on their investment.
Restrictions on the Use of Rule 144 by Shell Companies or Former Shell Companies.
Historically, the SEC has taken the position that Rule 144 under the Securities Act, as amended, is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies like us, to their promoters or affiliates despite technical compliance with the requirements of Rule 144. The SEC has codified and expanded this position in its amendments effective on February 15, 2008 and applies it to securities acquired both before and after that date by prohibiting the use of Rule 144 for resale of securities issued by shell companies (other than business transaction related shell companies) or issuers that have been at any time previously a shell company. The SEC has provided an important exception to this prohibition, however, if the following conditions are met: the issuer of the securities that was formerly a shell company has ceased to be a shell company; the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; the issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company. As such, due to the fact that we had been a shell company prior to October 2005, holders of “restricted securities” within the meaning of Rule 144, when reselling their shares pursuant to Rule 144, shall be subject to the conditions set forth herein.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Smaller reporting companies are not required to provide the information required by this item.
ITEM 2.
ITEM 2. PROPERTIES.
There is no private land ownership in the PRC. All land is either owned by the government of the PRC on behalf of all Chinese citizens or collectively owned by farmers. However, land use rights may be allocated by the PRC State Land Administration Bureau or its authorized branches. Helpson was granted land use rights by the PRC government for approximately 22,936 square meters of land located on Plot C09-2 in the Haikou Bonded Zone, Hainan Province, PRC in 2003. These land use rights will expire on September 10, 2063.
Helpson owns two production facilities in Haikou, Hainan Province, PRC, one of which has a construction area of 663.94 square meters and is located on the 6th floor of Standard Plant Building B, Jinpan Industrial Development Zone. The other factory, located on Plot C09-2 in the Haikou Bonded Zone, has two buildings with production area of 20,282.42 square meters, certificate number HK477872, and 6,593.20 square meters, certificate number HK122889.
In addition, Helpson rents offices located on the second floor of the Jiahai Building owned by Hainan Zhongfu Foreign Export Personnel Service Center (the “Center”) as its principal executive offices. Monthly rent at this facility is RMB 5,580 (approximately $843). The original term of the lease was 3 years, from December 1, 2010 to November 30, 2013. On December 31, 2011, this lease was superseded by a new lease, for a term of nine years, for office spaces on the second floor and the entire third floor at a monthly rent of RMB 20,000 (approximately $2,941), with a 5% increase every two years from the fourth year until the end of the term (the “2011 Lease”). On May 2, 2018, the 2011 Lease was superseded by a new lease, for a term of three years ending June 30, 2021, for office spaces on the second and third floor at a monthly rent of RMB 16,000 (approximately $2319), and RMB 30,000 (approximately $4,349), respectively. The aggregate area of the office space rented by Helpson is 1,686 square meters (16,812 square feet).
We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business. However, we anticipate a possible need for expansion and additional space as our production increases.
Mortgaged Property
Helpson entered into an eight-year construction loan facility dated June 21, 2013. The total loan facility amount is RMB80,000,000 (approximately $12.3 million), which had been fully utilized through May 7, 2014. We have incrementally repaid the principle of RMB66 million (approximately $10.1 million) of the construction loan per the repayment schedule as of January 10, 2021. 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. Upon the Company’s receipt of the ownership certificate over the new factory, the mortgage was formally placed on the new facility in the second quarter of 2016.
The loans referred to above are set forth in the table below:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. However, we are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our shares began trading on the NYSE American (Formerly known as NYSE Amex, NYSE MKT) on September 30, 2009 under the symbol “CPHI”. Prior to September 30, 2009, our shares traded on the OTC Bulletin Board under the symbol “CPHI.OB.”
Holders
As of March 22, 2021, there were approximately 135 shareholders of record of our common stock and an indeterminate number of beneficial holders who held our common stock in street name.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Equinity Trust Company, with offices located at 3200 Cherry Creek South Drive, Suite 430, Denver, Colorado 80209. Their telephone number is (303) 282-4800 and fax number is (303) 282-5800.
Dividend Policy
We have never paid or declared any dividend on our common stock and we do not anticipate paying cash dividends in the foreseeable future. As a result of our holding company structure, we would rely entirely on dividend payments from our subsidiaries, Onny Investment Ltd. and Hainan Helpson Medial & Biotechnology Co., Ltd., for our cash flow to pay dividends on our common stock. The PRC government imposes controls on the conversion of Renminbi into foreign currencies and the remittance of currencies out of the PRC, which may also affect our ability to pay cash dividends in the future.
Securities Authorized for Issuance under Equity Compensation Plans
Equity Compensation Plan Information
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a “smaller reporting company” as defined in Item 10 of Regulation S-K, we are not required to provide the information required by this item.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “seek”, “estimate”, “project”, “could”, “may” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the readers that any such forward-looking statements contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors, some of which are described in this report including in “Risk Factors” in Item 1A and some of which are discussed in our other filings with the Securities and Exchange Commission. These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward-looking statements made in connection with this report that is attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.
Business Overview & Recent Developments
We are principally engaged in the development, manufacture and marketing of pharmaceutical products for human use in connection with a variety of high-incidence and high-mortality diseases and medical conditions prevalent in the People’s Republic of China (the “PRC”). All of our operations are conducted in the PRC, where our manufacturing facilities are located. We manufacture pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions. The majority of our pharmaceutical products are sold on a prescription basis and all have been approved for at least one or more therapeutic indications by the National Medical Products Administration (the “NMPA”, formerly China Food and Drug Administration, or CFDA) based upon demonstrated safety and efficacy.
The 2019 Statistical Communique on the Development of China's Health and Health Industry shows that by the end of 2019, the total number of medical and health institutions in China reached 1,007,545, which represented an increase of 1,345 hospitals and 10,751 primary health care institutions compared with the condition in the previous year. There are 8.807 million beds in the national health care institutions by the end of 2019. Public and private hospitals accounted for 72.5% and 27.5%, respectively, for the beds in all hospitals. The number of beds in health facilities per 1,000 population increased from 6.03 in 2018 to 6.30 in 2019.
Drug consistency evaluation is a drug quality requirement in China's 12th Five-Year Plan for Drug Safety, that is, the State requires generic drugs to be consistent with the quality and efficacy of their corresponding original drugs. China's consistency evaluation of generic drugs had continued to proceed in 2020. The supporting policies from central and provincial governments have been constantly issued, including polices regarding consistency evaluation for injectable products. We have always taken the task of facilitating the consistency evaluation as our top priority, and worked on them actively. However, due to the continuous dynamic changes of the detailed policies, future market, expected investment, and return of investment (“ROI”) for each drug’s consistency evaluation, the whole industry, including us, has been making slow progress in terms of the consistency evaluation.
We have taken a more cautious and flexible attitude towards the initiating and progressing of an existing product’s consistency evaluation and to cope with the changing macro environment of drug sales in China. On the one hand, since "4 + 7" (refers to 11 selected pilot cities, including 4 municipalities and 7 other cities) trial Centralized Procurement (“CP”) activities initiated in 2018, four rounds of CPCP activities had been carried out by March 2021, which significantly reduced the price of the drugs that won the bids. On the other hand, the consistency evaluation has been adopted as one of the qualification standards for participating in the CP activities. As a result, we need to balance at least the two factors above before making decisions for any products . We have a product that passed biological equivalents experiments of consistency evaluation in March 2021. We plan to submit relevant documentation and data to NMPA in the near future.
In addition, we continue to explore in the field of comprehensive healthcare. Comprehensive healthcare is a general concept proposed according to the development of the times, social needs and changes in disease spectrum. According to the Outline of "Healthy China 2030" issued by Chinese government in October 2016, the total size of China's health service industry will reach more than RMB 8 trillion by 2020 and RMB 16 trillion by 2030. This industry focuses on people's daily life, aging and disease, pays attention to all kinds of risk factors and misunderstandings affecting health, and calls for self-health management, and advocates the comprehensive care of the entire process of life. It covers all kinds of health-related information, products and services, as well as actions taken by various organizations to meet the health needs. We launched Noni enzyme, a natural, healthy and nutrition-rich food supplement at the end of 2018, and wash-free sanitizer and masks in 2020 to address the market needs caused by COVID-19 in China. In addition, we also actively responded to the market demand for COVID-19 related products, and completed a one-time COVID-19 tester export transaction in 2020.
We will continue to optimize our product structure and actively respond to the current health needs of human beings.
Market Trends
As a generic drug company we are presented with a huge domestic market. We believe that through further upgrades and consistency evaluations, we will be able to meet the European and American production standards, which enables us to export our products to overseas markets. In the future, cost management and control ability will gradually become an important factor in determining the competitiveness of generic pharmaceutical enterprises. Although price control leads to a decline in the profitability, the winning enterprises in centralized procurement have a good chance of achieving price-for-volume in order to increase its market share and support its continuous innovation transformation. As a separate note, consumption upgrading in China drives the increase of optional consumption. With the improvement of residents' quality of life, the healthcare demand is also changing. We believe that there are a large number of unmet demands in comprehensive healthcare and Internet healthcare sectors.
In addition, the Office of the State Council issued “Pilot Plan for Marketing Authorization Holders” on May 24, 2016, allowing eligible drug research and development institutions and scientific researchers to become Marketing Authorization Holders (“MAH”) by obtaining drug marketing authorization and drug approval numbers from the State Council. This policy uses a management model of separating drug marketing authorization and drug production licenses, thereby allowing an MAH to produce pharmaceuticals itself or to consign production to other pharmaceutical manufacturers. This policy not only transitions our production practices to meet the European and United States standards by separating drug approval and production qualifications, and therefore changing the existing model of bundling drug approval numbers to pharmaceutical manufacturers in China, but also serves as a supplement to the ongoing consistency evaluations policy.
In general, demand for pharmaceutical products is still experiencing steady growth in China. We believe the ongoing generic drug consistency evaluations and reform of China’s drug production registration and review policies will have major effects on the future development of our industry and may change its business patterns. We will continue to actively adapt to the national policy guidance and further evaluate market conditions for our existing products, and competition in the market in order to optimize our development strategy.
Results of Operations for the Fiscal Year ended December 31, 2020
Revenue
Revenue was both $10.9 million for the years ended December 31, 2020, and 2019, respectively. This was mainly due to a foreign trade of COVID-19 testers we completed in the second quarter of 2020 that offsets the sales decrease of our current existing products in 2020 as compared to 2019. Because of the market demand for COVID-19 related products, we received an export order for diagnostic test, which we purchased from a third party. This one-time business contributed approximately $1.7 million to our revenue in 2020. This is a milestone of our continuous efforts to explore various niche markets, products and regions based on our experiences and abilities. Except for revenue from the export of COVID-19 tester, sales of our existing products decreased in 2020 compared to the condition in 2019. The main reason for this decline was that the negative impact on our sales caused by temporarily suspended operations, staff quarantine, and significantly declined outpatient volume at the primary hospitals caused by COVID-19.
Set forth below are our revenues by product category in millions (USD) for the years ended December 31, 2020 and 2019, excluding the one-time revenue from the trading of COVID-19 testers for the year ended December 31, 2020:
The most significant revenue decrease in terms of dollar amount was in our “Anti-Viral/ Infection & Respiratory” product category, which generated $5.13 million in sales revenue in 2020 compared to $6.33 million in 2019, a decrease of $1.20 million. This decrease was mainly due to a decrease in sales of our Roxithromycin caused by the implementation of the centralized procurement policy by the Chinese government, a stricter drug pricing control policy, as well as market fluctuation.
Sales in “CNS Cerebral & Cardio Vascular” product category was $2.03 million in sales revenue in 2020, which represented a decrease of $0.33 million compared to $2.35 million in 2019. This decrease was mainly due to a decrease in sales of our Ozagrel caused by the implementation of centralized procurement policy, a stricter drug centralized procurement policy, as well as market fluctuation.
Sales revenue in the “Other” category was $1.58 million in 2020, which represented a decrease of $0.28 million compared to $1.86 million in 2019. This decrease was mainly due to the sales decrease of Vitamin B6 in this year, caused by the implementation of centralized procurement policy, a stricter drug centralized procurement policy, as well as market fluctuation.
Our “Digestive Diseases” category generated $0.40 million of sales in 2020, which represented a decrease of $0.06 million compared to $0.46 million in 2019. This decrease was mainly due to a decrease in sales of our Omeprazole, caused by the implementation of centralized procurement policy, a stricter drug centralized procurement policy, as well as market fluctuation.
For the year ended December 31, 2020, revenue breakdown by product category experienced certain variances compared with that of the prior year. Sales in the “Anti-Viral/Infection & Respiratory” product category represented 56% and 58% of total sales in the years ended December 31, 2020 and 2019, respectively. The “CNS Cerebral & Cardio Vascular” category represented 22% of total revenue in 2020, compared to 21% in 2019. The “Digestive Diseases” category represented 5% and 4% of total revenue in 2020 and 2019, respectively. The “Other” category represented both 17% of revenues in 2020 and 2019, respectively.
Cost of Revenue
For the year ended December 31, 2020, our cost of revenue was $9.0 million, or 82.0% of total revenue, which represented a decrease of $0.4 million from $9.4 million, or 86.4% of total revenue, in 2019. This was mainly due to the impact of the one-time COVID-19 tester transaction and the government relief for employees’ social insurance in 2020.
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2020 was $2.0 million, compared to $1.5 million in 2019. Our gross profit margin in 2020 was 18.0% compared to 13.6% in 2019. This increase in our gross profit margin was mainly due to the impact of the one-time COVID-19 tester transaction and the government relief for employees’ social insurance in 2020.
Selling Expenses
Our selling expenses for the year ended December 31, 2020 were $2.2 million, a decrease of $0.2 million compared to $2.4 million for the year ended December 31, 2019. Selling expenses accounted for 20.4% of the total revenue in 2020 compared to 21.5% in 2019. This decrease was mainly due to emergency quarantine measures which reduced business travel and marketing activities due to the COVID-19 pandemic.
General and Administrative Expenses
Our general and administrative expenses for the year ended December 31, 2020 were $1.8 million, as compared to $2.3 million in 2019. General and administrative expenses accounted for 16.8% and 21.0% of our total revenues in 2020 and 2019, respectively. This decrease was mainly due to lower travel and office costs due to the impact of COVID-19, as well as offsets for administrative costs from government subsidies.
Research and Development Expenses
Our research and development expenses for the year ended December 31, 2020 was $0.38 million, compared to $0.23 million in 2019. Research and development expenses accounted for 3.5% and 2.1% of our total revenues in 2020 and 2019, respectively. These expenditures were mainly spent on the consistency evaluation of our existing products.
Impairment Loss
There was no impairment loss for the year ended December 31, 2020. However, we recognized $17.02 million impairment loss for the year ended December 31, 2019, among which, there was an impairment loss for the advances made to laboratories for the year December 31, 2019 in the amount of $17,015,117. As a pharmaceutical company, we have been focusing on the development and maintenance of our intangible assets, mainly in the form of medical formulas. The consistency evaluations discussed under the “Business Overview & Recent Developments” section hereof is expected to have a significant impact on all generic products not only in our pipeline, but also throughout the existing Chinese market. After evaluating the detailed rules under this policy, in addition to the potential ROI and our recent cash flow position, our management made certain assessments regarding the impairment of our intangible assets, and identified four formulas that would likely to be unable to generate positive cash flow in the foreseeable future and therefore recognized impairment loss on them accordingly as of December 31, 2019. The management determined to impair all advances at December 31, 2019, but may resume the development of these formulas in the future if sufficient funding and other favorable conditions arise.
Bad Debt Expenses
Our bad debt expenses for the year ended December 31, 2020 was $115,186, as compared to $3,153 in 2019. This increase was mainly due to the write-off of accounts receivable from some customers who ceased operations due to the COVID-19 outbreak in 2020.
In general, our normal customer credit or payment terms are 90 days. This has not changed in recent years. Due to the peculiar environment affecting the Chinese pharmaceutical market, deferred payments to pharmaceutical companies by state-owned hospitals and local medicine distributors are common.
The amount of net accounts receivable that were past due (or the amount of accounts receivable that were more than 180 days old) was $0.06 million and $0.15 million as of December 31, 2020 and 2019, respectively.
The following table illustrates our accounts receivable aging distribution in terms of the percentage of the total accounts receivable as of December 31, 2020 and 2019:
Our bad debt allowance estimate practice is that we consider accounts receivable balances aged within 180 days current, except for any individual uncollectible account assessed by management. We account for the following respective percentage as bad debt allowance based on age of the accounts receivables: 10% of accounts receivable that are between 180 days and 365 days old, 70% of accounts receivable that are between 365 days and 720 days old, and 100% of accounts receivable that are greater than 720 days old.
We recognize bad debt expenses per actual write-offs as well as changes of allowance for doubtful accounts. To the extent that our current allowance for doubtful accounts is higher than that of the previous period, we recognize a bad debt expense for the difference during the current period, and when the current allowance is lower than that of the previous period, we recognize a bad debt credit for the difference. The allowance for doubtful account balances were $18.2 million and $17.6 million as of December 31, 2020 and December 31, 2019, respectively. The changes in the allowances for doubtful accounts during the years ended December 31, 2020 and 2019 were as follows:
Loss from Operations
Our operating loss for the year ended December 31, 2020 was $2.6 million, compared to an operating loss of $20.4 million in 2019. The decrease in loss from operations was mainly a result of the decrease in impairment of long term assets as discussed under the heading “Impairment Loss” above.
Net Interest Expense
Net interest expense was both $0.29 million for the year ended December 31, 2020 and 2019, respectively.
Net Loss
Net Loss for year ended December 31, 2020 was $2.9 million, compared to net loss of $20.7 million for the year ended December 31, 2019. The decrease in net loss was mainly a result of the decrease in impairment of long term assets as discussed under the heading “Impairment Loss” above.
For the year ended December 31, 2020, loss per basic and diluted common share was $0.07, compared to loss per basic and diluted share of $0.48 for the year ended December 31, 2019.
The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 43,623,273 for 2020, as compared to 43,579,557 for 2019.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated from operations and bank lines of credit. In addition to the aggregated advance of $724,963 from our CEO in 2019, we received some temporary advances from and made several repayments to her in 2020. As of December 31, 2020, the aggregated advance from our CEO was $740,316 for use in operations. Our cash and cash equivalents were $1.0 million, representing 4.5% of our total assets, as of December 31, 2020, as compared to $1.1 million, representing 4.8% of our total assets as of December 31, 2019. All of the $1.0 million of cash and cash equivalents as of December 31, 2020 are considered to be reinvested indefinitely in the Company’s Chinese subsidiary, Helpson and is not expected to be available for payment of dividends or for other payments to its parent company or to its shareholders. 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 8,000,000 (approximately $1.2 million) have been advanced at December 31, 2020. The loan bears interest at a rate of 4.25% per annum. Advances on the line of credit shall be repaid in installments semi-annually for two years from the date of the advance; the first repayment of RMB 500,000 (approximately $0.07 million) was made on October 20, 2020, and the second repayment of RMB 300,000 (approximately $0.06 million) was made in January 2021. The Company has an additional RMB 2,000,000 (approximately $0.3 million) available under the line, subject to a risk review and approval by the third party guarantee company. On June 30, 2020 the Company obtained a line of credit with Bank of Communications for an aggregate amount of RMB 8,500,000 (approximately $1.3 million), all of which have been advanced. The loan bears interest at a rate of 4.05% per annum. In addition, we entered into an eight-year construction loan facility on September 21, 2013. The total construction loan facility amount was RMB 80 million (approximately $13 million), which had been fully utilized through May 7, 2014. As of December 31, 2020, the construction loan installments to be repaid within the next 12 months are approximately $2.3 million. On July 10, 2020, we repaid such principal and accumulatively repaid the principal of RMB 65 million (approximately $9.2 million) of the construction loans per the payback schedule. The total balance of the construction loan facility is RMB 15 million ($2.3 million) as of December 31, 2020, which is all due within 12 months, and a repayment of RMB 1 million (approximately $0.15 million) was made in January 2021. The Company also obtained a line of credit of RMB 3,200,000 (approximately $0.5 million) from China CITIC Bank in September 2020 and obtained an advance of RMB 2,343,340 (approximately $344,098), and the remaining of RMB 856,660 (approximately $125,793) in October under this line. The loan bears interest at a rate of 4.50% per annum. The line of credit is due in one year on the anniversary date of the advance. These factors raised substantial doubts about the Company’s ability to continue as a going concern. Cash flow generated from operating activities and lines of credit were used to fund our daily operating expenses as well as the repayment of our loan facility.
Our net accounts receivable was $0.5 million and $0.6 million as of December 31, 2020 and 2019, respectively.
Total inventory was $3.7 million and $3.6 million as of December 31, 2020 and 2019, respectively.
Based on our current operating plan, management believes that cash provided by operations, in addition to the newly obtained lines of credit in April, June, and September 2020 will be sufficient to meet our working capital needs and our anticipated capital expenditures for 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. We may seek debt or equity financing as necessary when we believe the market conditions are the most advantageous to us and/or reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Although our Chairperson and Chief Executive Officer had advanced funds for working capital during 2020 and 2019, there can be no assurances that this will be the case in the future. There can be no assurance that any additional financing will be available on acceptable terms, if at all.
Operating Activities
Net cash used by operating activities was $0.04 million in the year ended December 31, 2020, compared to net cash flow of $0.61 million provided by operating activities in 2019.
As of December 31, 2020, our net accounts receivable was $0.5 million, a decrease of $0.1 million from $0.6 million as of December 31, 2019.
As of December 31, 2020, total inventory was $3.7 million, stayed close to $3.6 million as of December 31, 2019.
Investing Activities
During the year ended December 31, 2020, net cash used in investing activities was $0.87 million, compared to $0.13 million for the year ended December 31, 2019. The increase was mainly due to the purchase of mask production lines.
Financing Activities
Cash flow generated from financing activities was $0.62 million in the year ended December 31, 2020; compared to $1.7 million cash used in the year ended December 31, 2019. This change was mainly because of a few credit lines we entered in 2020.
According to relevant PRC laws, companies registered in the PRC, including our PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of their after-tax net income, as determined under the accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach fifty percent (50%) of the companies’ registered capital prior to their remittance of funds out of the PRC. Allocations to these reserves and funds can only be used for specific purposes and are not transferrable to the parent company in the form of loans, advances or cash dividends. For the years ending December 31, 2020 and 2019, Helpson’s net assets totaled $5,777,000 and $7,189,000, respectively. Due to the restriction on dividend distribution to overseas shareholders, the amount of Helpson’s net assets that was designated for general and statutory capital reserves, and thus could not be transferred to our parent company as cash dividends, was 50% of Helpson’s registered capital, which is $8,145,000 for each of the fiscal years ended December 31, 2020 and 2019. Since the amount that Helpson must set aside for the statutory surplus fund only accounts for 141% and 113%, respectively, of its total net assets, this reserve does not have a major impact on our liquidity. There were no allocations to the statutory surplus reserve accounts during the year ended December 31, 2020.
The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. Our businesses and assets are primarily denominated in RMB. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires the submission of a payment application form together with certain invoices and executed contracts. The currency exchange control procedures imposed by Chinese government authorities may restrict Helpson, our Chinese subsidiary, from transferring its net assets to our parent company through loans, advances or cash dividends.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any off-balance sheet arrangements.
Critical Accounting Policies
Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. The discussion of our critical accounting policies contained in Note 1 to our consolidated financial statements, “Organization and Significant Accounting Policies”, is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Smaller reporting companies are not required to provide the information required by this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated balance sheets, as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020 and 2019, together with the related notes and the report of our independent registered public accounting firms, are set forth on the “F” pages of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and interim Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. Based on that evaluation, our Chief Executive Officer and interim Chief Financial Officer concluded that as of December 31, 2020, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended due to the material weakness in our internal control over financial reporting discussed below.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of a company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of a company are being made only in accordance with authorizations of management and directors of a company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the financial statements.
Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected in a timely manner. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Therefore, any current evaluation of controls cannot and should not be projected to future periods.
Management assessed our internal control over financial reporting as of the year ended December 31, 2020. In making this assessment, management used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the report entitled “Internal Control-Integrated Framework.” The 2013 COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.
Based on management’s assessment using the COSO criteria, management has concluded that our internal control over financial reporting was not effective as of December 31, 2020, to allow our management, employees and consultants, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely and reasonable basis and to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our Chief Executive Officer and interim Chief Financial Officer has determined there existed a material weakness in our internal control over financial reporting as of December 31, 2020, with respect to our lack of accounting financial reporting personnel knowledgeable in US GAAP. As of the date of this report, we are undertaking steps to address the aforementioned material weaknesses by obtaining education and training for our personnel regarding the proper accounting under U.S. GAAP and reviewing the processes to correct the identified weaknesses. Notwithstanding these material weaknesses, management has concluded that our consolidated financial statements included in this annual report are fairly stated in all material respects in accordance with U.S. GAAP for each period presented herein.
Because we are a smaller reporting company, this Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
General
Listed below are the names and ages of all our directors and executive officers at March 22, 2021, along with their positions, offices and term:
All of our independent directors hold offices until our next annual meeting of the stockholders, at which a successor will be duly elected and qualified or until his or her earlier resignation, removal from office, death or incapacity. Non-independent directors will hold office for a term of three (3) years or when their respective successors shall have been elected and shall qualify, or upon their prior death, resignation or removal. Directors may be re-elected for successive terms. Officers serve at the discretion of the board of directors.
The following sets forth biographical information regarding the above directors and executive officers.
Zhilin Li is the Chairman, President, Chief Executive Officer and interim Chief Financial Officer of our company. She has served as a director since 2006 and as the President and Chief Executive Officer since 2005. She was a founder of Helpson, and served as Chairman and Chief Executive Officer of Helpson from 1993 to 2005. Ms. Li was formerly the president of Haikou Bio-Engineering Institute as well as the vice president of Sichuan Institute of Biology. She graduated from Sichuan University with a degree in biology.
Heung Mei Tsui has served as a director of the Company since April 28, 2009. Previously, Ms. Tsui served as a member of our board from October 2005 to February 2008. Ms. Tsui has been a self-employed businesswoman engaged in strategic investments and was previously engaged in the pharmaceutical chemical raw material import/export business. Ms. Tsui graduated from Hunan Financial& Economic College in 1982.
Gene Michael Bennett has served as our independent director since February 2008. Presently, Mr. Bennett is Chairman of the board of directors for Bonita Healthcare Ltd, Houston, Texas, USA, and Chairman of the Board of Redwood Senior Living Inc. located in Alameda County, California, USA. From 2013 through 2015 Mr. Bennett served as part-time CFO for Kang Jia Fu, Royal Traditional Health Investment Management Co. Ltd, located in Wuxi, Jiangsu Province, China and advisor to Swiss Capital Asia, located in Hong Kong. From 2009 through 2013, Mr. Bennett served as the CEO of American General Business Association, located in Beijing, China. Mr. Bennett was a partner of Nexis Investment Consulting Corporation based in Beijing from 2004-2009. He was a partner of ProCFO Company based in California which provided contract chief financial officer service for firms during 2000-2004. During 1998-2000, he was a basic law, accounting and tax professor at University of Hawaii, and an accounting, tax and audit professor at Chaminade University of Honolulu, Hawaii, USA. In addition, he previously served as the chief financial officer and member of the board of directors of Argonaut Computers in Southern California. Mr. Bennett worked as an accounting and audit professor at Chapman University and an accounting, tax, and audit professor at California State University at Fullerton. He also acted as chief financial officer and a board member of the National Automobile Club. Mr. Bennett graduated from Michigan State University with an MBA in Finance and BA in Accounting. He obtained his CPA license from the State of Colorado, which is currently inactive.
Yingwen Zhang has served as our independent director since February 2008. He also currently serves as a consultant of Shanghai Reseat Medical Tech Co. Ltd., a medical device producer. He acted as Senior Consultant and Chairman of HSE (Health Safe and Environment) Committee of SINOFERT Holdings Limited (HKG: 0297) of SINOCHEM Group from October 2005 to June 2009. He served as an independent director of a public company, Chongqing New Energy Co., Ltd. (SH.600847), from 2007 to 2018. Additionally, Mr. Zhang was appointed as the Commercial Counselor of the China Embassy in Malaysia from March 2000 through October 2005. Prior to that, from 1988 to 2000, Mr. Zhang was appointed as the Director-General to Sichuan Provincial Foreign Trade and Economic Cooperation Bureau (the Commercial Bureau of Sichuan Province, China). In his early career he was a chemical engineer and senior economist, and then became a senior manager for several chemical corporations in China. From 1983 to 1988, Mr. Zhang served as vice CEO and then CEO of a large nature gas-chemical state owned enterprise (SOE) in the PRC affiliated with the SINOPEC Group. Mr. Zhang graduated from the Chemical Engineering Department of Tianjin University in 1967.
Baowen Dong has served as our independent director since February 2008. Mr. Dong participated on the expert team of the Sichuan University from 2003 to 2008, doing teaching evaluation and assessment work in Engineering and Medical Science faculty. In the past few years, Mr. Dong has focused on the research of China’s Health Care Reform. Previously, he concentrated on biomedical and medical information researches. Mr. Dong has had different roles in areas of teaching and research, including serving as a department head and a professor, at Sichuan University from 1974 to 2001. Additionally, Mr. Dong was engaged in the field of communication technology from 1966 to 1974. Mr. Dong graduated from Xidian University in 1966.
Family Relationships
There are no family relationships among our directors or executive officers.
Director or Officer Involvement in Certain Legal Proceedings
To our knowledge, our directors and executive officers were not involved in any legal proceedings as described in Item 401(f) of Regulation S-K in the past ten years.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and persons who own more than 10% a registered class of our equity securities (“Reporting Persons”), to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. The Reporting Persons are also required by SEC rules to furnish us with copies of Section 16(a) forms they file. Based upon a review of the filings made on their behalf during the fiscal year ended December 31, 2020 as well as an examination of the SEC’s EDGAR system Form 3, 4, and 5 filings (including amendments to such forms) and our records, we believe that, during the year ended December 31, 2020, the Reporting Persons met all applicable Section 16(a) filing requirements except that Ms. Zhilin Li did not timely file a Form 4 to report her acquisition of 2,000,000 shares of the Company’s common stock on December 23, 2020, which Form 4 was subsequently filed on January 8, 2021.
Code of Ethics
On July 8, 2008, we adopted a code of business conduct and ethics for all directors and employees (including officers) within the meaning of the regulations adopted by the SEC under Section 406 of the Sarbanes-Oxley Act of 2002. The code has been designed to deter wrongdoing and promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, (ii) full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us, (iii) compliance with applicable governmental laws, rules and regulations, (iv) the prompt internal reporting of violations of the code to an appropriate person or persons, and (v) accountability for adherence to the code. The application of the code to the persons it applies to may only be waived by our Board of Directors in accordance with SEC regulations and the Sarbanes-Oxley Act of 2002. A copy of the code is available on our website at www.chinapharmaholdings.com or may be obtained by sending a written request to our corporate secretary at China Pharma Holdings, Inc., Second Floor, No. 17, Jinpan Road, Haikou, Hainan Province, China 570216.
Audit Committee
On February 1, 2008, we established an audit committee, which currently consists of our three independent directors: Gene Michael Bennett, Yingwen Zhang and Baowen Dong. Mr. Bennett, the Chairman of the Audit Committee, is an “audit committee financial expert” as defined in Item 401(d)(5) of Regulation S-K promulgated under the Securities Act. The audit committee carries out its responsibilities in accordance with the terms of its Audit Committee Charter, a copy of which attached as Exhibit 99.1 to our Annual Report on Form 10-K filed on March 17, 2009, and available on our website at www.chinapharmaholdings.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary of Executive Compensation
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our principal executive officer and principal financial officer during the last two fiscal years in all capacities to our Company and our subsidiaries. No other executive officer received compensation in excess of $100,000 during the fiscal year ended December 31, 2020.
SUMMARY COMPENSATION TABLE
Employment Agreements
Zhilin Li. Hainan Helpson Medical & Biotechnology Co., Ltd., our wholly-owned subsidiary and operating entity in the PRC (“Helpson”), entered into an employment agreement with Ms. Zhilin Li, our Chairman of the Board and Chief Executive Officer. Upon the expiration of the original agreement, Helpson renewed the agreement with Ms. Li on the same terms as the original agreement. The new employment agreement will expire on June 30, 2025. Pursuant to the terms of the new employment agreement, Ms. Li agreed to continue to serve as Helpson’s Chief Executive Officer for a term of five years at an annual salary of RMB800,000. Helpson may adjust Ms. Li’s compensation based upon her production and operating achievement and her technical ability and working performance. Ms. Li’s total annual cash compensation for the fiscal year ended December 31, 2020, when aggregated with her compensation from our U.S. holding company level, was $241,600.
Payments upon Termination or Change-in-Control
PRC Law. Under the applicable laws of the PRC, we must pay severance to all employees who are Chinese nationals and who are terminated with or without cause, or whose employment agreement with us expires and we choose not to continue their employment. The severance benefit required to be paid under the laws of the PRC equals the average monthly compensation paid to the terminated employee (including any bonuses or other payments made in the 12 months prior to the employee’s termination) multiplied by the number of years the employee has been employed with us, plus an additional month’s salary if 30 days’ prior notice of such termination has not been given. However, if the average monthly compensation to be received by the terminated employee exceeds three times the average monthly salary of the employee’s local area, as determined and published by the local government, such average monthly compensation shall be capped at three times the average monthly salary of the employee’s local area. Except as described above, our executive officer does not have any other agreement or arrangement under which she may be entitled to severance payments upon termination of employment.
Outstanding Equity Awards at Fiscal Year-End
None.
Discussion of Summary Compensation and Grants of Plan-based Awards Tables
A summary of certain material terms of our existing compensation plans and arrangements is set forth below.
On November 12, 2010, our Board of Directors adopted, and on December 22, 2010 our shareholders approved the 2010 Long-Term Incentive Plan (the “2010 Incentive Plan”). 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 shall be extended to December 31, 2029. The Amendment was adopted by the shareholders on December 19, 2019. The 2010 Incentive Plan gave us the ability to grant stock options, restricted stock, stock appreciation rights and performance units to employees, directors and consultants, or those who will become employees, directors and consultants of our company and/or our subsidiaries. The 2010 Incentive Plan currently allows for equity awards of up to 4,000,000 shares of common stock. As of March 20, 2021, 2,175,000 shares of restricted stock were outstanding, and no options were outstanding.
Director Compensation
The following table sets forth information concerning cash and non-cash compensation earned by or paid to our directors during the year ended December 31, 2020.
DIRECTOR COMPENSATION
Our directors will also be reimbursed for all of their out-of-pocket expenses in traveling to and attending meetings of our Board of Directors and committees on which they serve.
Ms. Zhilin Li, our Chairman, President and Chief Executive Officer, was also compensated for serving on our board of directors as set forth in the Summary Compensation Table appearing earlier in this Item 11.
Engagement Letters
On December 29, 2020 we renewed the engagement letters with each of our three independent directors. Pursuant to the renewed engagement letters, entered into on the same terms and conditions as the previous engagement letters and for a term of one year, each of Mr. Zhang and Mr. Dong is entitled to receive annual compensation of RMB40,000 (approximately $5,799), payable quarterly and Mr. Bennett is entitled to receive annual compensation of $16,000, payable quarterly, and a warrant to purchase 5,000 shares of common stock at an exercise price of $0.44 per share. As of the date of this report, no warrants have been issued to Mr. Bennett.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The following table sets forth certain information as of March 22, 2021, with respect to the beneficial ownership of our common stock, the sole outstanding class of our voting securities, by (i) any person or group owning more than 5% of each class of voting securities, (ii) each director, (iii) each executive officer and (iv) all executive officers and directors as a group.
As of March 22, 2021, an aggregate of 45,579,557 shares of our common stock were outstanding.
*Represents less than 1%.
(1)Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or investment power within 60 days.
(2)Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares and the address of such person is c/o China Pharma Holdings, Inc., 2nd Floor, No. 17 Jinpan Road, Haikou, Hainan Province, People’s Republic of China 570216.
(3)In determining the percentage of common stock owned by the beneficial owners, (a) the numerator is the number of shares of common stock beneficially owned by such owner, including shares the owner may acquire, within 60 days of March 22, 2021, upon the exercise of the options or warrants, if any, held by the owner; and (b) the denominator is the sum of (i) the total 45,579,557 shares of common stock outstanding as of March 20, 2021, and (ii) the number of shares underlying any options or warrants, which such owner has the right to acquire upon the exercise of such options or warrants within 60 days of March 22, 2021 (for those who have options or warrants).
(4)Pursuant to the terms of his engagement letters, Mr. Bennett is entitled to receive warrants to purchase an aggregate of 65,000 shares of our common stock (5,000 shares in each of year between 2008 to 2020 fiscal years). As of the date of this report no such warrants were issued.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Transactions
Ms. Tsui, one of our directors, has made various loans to the Company. The balance of such loans from Ms. Tsui remained $1,354,567 as of December 31, 2020 and 2019. The loans bear interest at a rate of 1% per annum and principal and interest were payable by December 31, 2021, pursuant to a loans extension confirmation letter executed by the Company and Ms. Tsui in 2020. We recognized interest expense of $125,487 and $111,941 for the years ended December 31, 2020 and 2019, respectively.
The Company received net advances totaling $686,317 and $667,440 from its Chairperson, Chief Executive Officer and Interim Chief Financial Officer as of December 31, 2020 and 2019, respectively. On July 8, 2019 the Company entered into a loan agreement to borrow cash of RMB 4,770,000 ($691,459) 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 year ended December 31, 2020 was $46,764.
Independence of the Board of Directors
The board of directors has determined that Messrs. Gene Michael Bennett, Baowen Dong and Yingwen Zhang are “independent directors” as defined in the listing standards of NYSE American.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by B F Borgers CPA PC, our principal accountant , for professional services rendered for the audit of our annual financial statements included in our Annual Reports on Form 10-K, for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q, and for services in connection with statutory and regulatory filings or engagements were approximately $100,000 for the fiscal year ended December 31, 2020, and $110,000 for the fiscal year ended December 31, 2019.
Audit-Related Fees
We did not incur any audit-related fees during the fiscal years ended December 31, 2019 and 2018.
Tax Fees
We have engaged our principal accountant to render tax services to us in the year ended December 31, 2020 for $5,400.
All Other Fees
We did not engage our principal accountant to render services to us during the last two fiscal years, other than as reported above.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Audit Committee to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, the Audit Committee pre-approved the audit service performed by B F Borgers CPA PC, for our consolidated financial statements as of and for the year ended December 31, 2020.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
Financial Statements
The following financial statements of China Pharma Holdings, Inc. and Reports of Independent Registered Public Accounting Firms are presented in the “F” pages of this report:
(b) Exhibits
See the Exhibit Index following the signature page of this report, which Index is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 2021 CHINA PHARMA HOLDINGS, INC.
By: /s/ Zhilin Li
Name: Zhilin Li
Title: Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Zhilin Li
Chairman of the Board, President, Chief Executive Officer
March 26, 2021
Zhilin Li
(principal executive officer) and interim Chief Financial Officer
(principal financial officer and principal accounting officer)
/s/ Heung Mei Tsui
Director
March 26, 2021
Heung Mei Tsui
/s/ Gene Michael Bennett
Director
March 26, 2021
Gene Michael Bennett
/s/ Yingwen Zhang
Director
March 26, 2021
Yingwen Zhang
/s/ Baowen Dong
Director
March 26, 2021
Baowen Dong
CHINA PHARMA HOLDINGS, INC.
Exhibit Index to Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2020
*Exhibits filed herewith.
CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the shareholders and the board of directors of
China Pharma
Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of China Pharma Holdings, Inc. and its subsidiaries (collectively the “Company”) as of December 31,
2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and
cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as
the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the
two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States.
Going concern uncertainty
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company incurred recurring losses from operations, has net current liabilities and an accumulated deficit that raise substantial
doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated
below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required
to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not,
by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.
Valuation of long-lived assets
As described in Note 1 of the Company’s financial statements, the Company performs an annual impairment assessment of its long-lived assets, including property, plant, and equipment, intangible assets, and operating lease right-of-use assets, or more frequently if events or circumstances indicate that the carrying values may not be recoverable.
Auditing the recoverability of long-lived assets involved complex judgment due to the significant estimation required in determining the future cash flows of the long-lived assets. Specifically, the cash flow forecasts were sensitive to significant assumptions about future market and economic conditions. Significant assumptions used in the Company’s recoverability estimates included sales volume, pricing, cost of raw materials and labor, marketing spending, general and administrative expenses, and tax rates, as applicable.
We obtained an understanding of the controls over the Company’s annual impairment assessments for long-lived assets and tested the estimated future cash flows of the long-lived assets based on our risk assessments. Our audit procedures included, among others, comparing significant inputs to observable third party and industrial sources, and evaluating the reasonableness of management’s projected financial information by comparing to observable average industry historical trends and projections, and other internal and external data. We performed sensitivity analyses of significant assumptions to evaluate the change in the recoverability of the long-lived assets and assessed the historical accuracy of management’s estimates. We also assessed the Company’s disclosure of its annual impairment assessments included in Note 1.
/s/ B F Borgers CPA PC
We have served as the Company’s auditor since 2016.
Lakewood, Colorado
March 26, 2021
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part
of these consolidated financial statements.
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
The accompanying notes are an integral part
of these consolidated financial statements.
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part
of these consolidated financial statements.
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part
of these consolidated financial statements.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
- China Pharma Holdings, Inc., a Nevada corporation (the “Company”), 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.
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 Wholly Foreign Owned Enterprise (“WFOE”) status on June 21, 2005.
Helpson is principally engaged in the development,
manufacture and marketing of pharmaceutical products for human use in connection with a variety of high-incidence and high-mortality
diseases and medical conditions prevalent in the PRC. All of its operations are conducted in the PRC, where its manufacturing facilities
are located. Helpson manufactures pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules,
and cephalosporin oral solutions. The majority of its pharmaceutical products are sold on a prescription basis and all have been
approved for at least one or more therapeutic indications by the National Medical Products Administration (the “NMPA”,
formerly China Food and Drug Administration, or CFDA) based upon demonstrated safety and efficacy.
Liquidity and Going Concern
As of December 31, 2020, the Company had
cash and cash equivalents of $0.96 million and an accumulated deficit of $28.6 million. The Company’s Chairperson, Chief
Executive Officer and Interim Chief Financial Officer has advanced an aggregate of $0.7 million as of December 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 8,
during 2020 the Company obtained lines of credit from three banks for an aggregate amount of RMB 19,700,000 (approximately $3.0
million). While the current plans and additional financing will allow the Company to fund its operations in the next twelve months,
there is 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.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
The accompanying 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.
Consolidation and Basis of Presentation -
The accompanying 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. They 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.
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.
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
$115,186 and $3,153 for the years ended December 31, 2020 and 2019, respectively.
Trade accounts receivable that has 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 $687,715 and $0 against the allowance for the years ended December 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 CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Leases - At lease commencement,
the Company records a lease liability based on the present value of lease payments over the expected lease term including any options
to extend the lease that the Company is reasonably certain to exercise. The Company calculates the present value of lease payments
using an incremental borrowing rate as the Company’s leases do not provide an implicit interest rate. The Company’s
incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount
equal to the lease payments under similar terms. At the lease commencement date, the Company records a corresponding right-of-use
lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor
prior to the lease commencement date. The Company may enter into leases with an initial term of 12 months or less (“Short-Term
Leases”). For any Short-Term Leases, the Company records the rent expense on a straight-line basis and does not record the
leases on the condensed balance sheet.
After lease commencement, the Company measures
its leases as follows: (i) the lease liability based on the present value of the remaining lease payments using the discount rate
determined at lease commencement and (ii) the right-of-use lease asset based on the remeasured lease liability, adjusted for any
unamortized lease incentives received, any unamortized initial direct costs and the cumulative difference between rent expense
and amounts paid under the lease agreement. Any lease incentives received and any initial direct costs are amortized on a straight-line
basis over the expected lease term. Rent expense is recorded on a straight-line basis over the expected lease term.
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. For the years ended December 31, 2020 and 2019
the Company evaluated its long-lived assets and determined that necessary impairment adjustments were $0 and $17,015,117, respectively. In
2019, the Company wrote off the remaining four advances for intangible assets.
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 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 item. 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 $719,786 and $505,398 and are recorded as a liability on the
accompanying balance sheet as “Advances from customers” at December 31, 2020 and 2019, respectively.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Cost of Revenues -
Cost of revenues includes wages, materials, depreciation, handling charges, and other expenses associated with the manufacture
and delivery of products.
Research and Development -
Research and development expenditures are recorded as expenses in the period in which they occur.
Basic and Diluted Loss per Common
Share - Basic loss per common share is computed by dividing net loss by the weighted-average number of common
shares outstanding during the period. Diluted loss per share is calculated to give effect to potentially issuable dilutive common
shares.
There were no potentially dilutive common
shares outstanding during the years ended December 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 loss or total cash flows.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“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 Accounting Standards Codification (“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 ASC 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.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
NOTE 2 - INVENTORY
Inventory consisted of the following:
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets as follows:
Depreciation relating to office equipment
was included in general and administrative expenses, while all other depreciation was included in cost of revenue. For the years
ended December 31, 2020 and 2019, depreciation expense was $2,643,820 and $2,871,134, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the cost of
medical formulas approved for production by NMPA. The Company did not obtain NMPA production approval for any new medical formulas
during the years ended December 31, 2020 and 2019 and no costs were reclassified from advances to intangible assets during the
years ended December 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 $35,650 and $57,665 for the years ended December 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.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
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 years ended December 31, 2020 and 2019.
Intangible assets consisted solely of NMPA
approved medical formulas as follows:
The estimated aggregate annual amortization expense for each
of the next five years and thereafter is as follows:
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 and assistance with the NMPA approval process.
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 for its current pipeline products.
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 to apply 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.
During the year ended December 31, 2019,
the Company reviewed the contracts relating to advances made for purchases of intangible assets with independent laboratories and
determined that the advances made by the Company for four formulas were impaired. As a result, the Company recognized an impairment
loss for the advances made to these laboratories for the year ended December 31, 2019 in the amount of $17,015,117. 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 CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
NOTE 6 - RELATED PARTY TRANSACTIONS
A member of the Company’s board of
directors (“Board”) had advanced to the Company an aggregate amount of $1,354,567 as of December 31, 2020 and 2019
which are recorded as “Other payables - related parties” on the accompanying consolidated balance sheets. The
advances bear interest at a rate of 1.0% per year. Total interest expense for the years ended December 31, 2020 and
2019 was $13,546 and $13,546, respectively.
The Company received advances totaling $163,825 during the year ended December 31, 2020 from its Chairperson, Chief Executive Officer and Interim Chief Financial Officer; and paid back $191,639 to her in the same period. Total amounts owed were $740,316 and $724,963 and are recorded as “Borrowings from related parties” on the accompanying consolidated balance sheets as of December 31, 2020 and December 31, 2019, respectively. On July 8, 2019 the Company entered into a loan agreement 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. The due date of the loan agreement was extended to July 10, 2021. Total interest expense related to the loan for the years ended December 31, 2020 and 2019 was $43,083 and $12,393, respectively.
Compensation payable to the Chairperson,
Chief Executive Officer and Interim Chief Financial Officer is included in “Other payables” in the accompanying consolidated
balance sheets totaling $1,658,706 and $2,307,986 as of December 31, 2020 and 2019, respectively.
On December 23, 2020 the Board approved
the issuance of 2,000,000 shares of common stock from the Company’s 2010 Long-Term Incentive Plan, as amended for the partial
conversion of unpaid compensation totaling $864,480 to the Chairperson, Chief Executive Officer and Interim Chief Financial Officer.
The shares were issued at a market price of $0.43 per share based on the average of the closing prices during the five trading
days prior to the issuance date, and higher than the closing price of $0.42 per share on the issuance date.
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 December 31, 2020
and 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 December 31, 2020 and December 31, 2019, the
Company had outstanding banker’s acceptance notes in the amount of $0 and $109,908, respectively.
NOTE 8 - CONSTRUCTION LOAN FACILITY
AND LINES OF CREDIT
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 December 31, 2020, the Company had no additional amounts available to it under this facility.
During the years ended December 31, 2020 and 2019, the Company made principal payments in the amount of $2,174,669 (RMB 15,000,000)
and $2,174,399 (RMB 15,000,000), respectively.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Lines of Credit
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) were advanced in April, and RMB 3,000,000 (approximately $0.4 million) were advanced in July 2020. 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 above. 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 2,000,000 (approximately $0.3 million) available under the line, subject to a risk review and approval by the third party guarantee company. Total interest expense under this facility for the years ended December 31, 2020 and 2019 was RMB189,892 ($29,103) and $0, respectively. The Company repaid RMB 500,000 (approximately $0.07 million) and RMB 300,000 (approximately $0.05 million) to Postal Savings Bank of China in October 2020, and January 2021, respectively, as per the payment schedule.
On June 30, 2020 the Company obtained a line of credit with Bank of Communications for an aggregate amount of RMB 8,500,000 (approximately $1.2 million) of which RMB 8,500,000 have been advanced. The loan bears interest at the rate of 4.05% per annum. The line of credit is due in one year on the anniversary date of the line of credit. In addition, the Company’s Chief Executive Officer and Chair of the Board personally guaranteed the new line of credit and pledged personal assets as collateral for the loan. Total interest expense for the years ended December 31, 2020 and 2019 was RMB166,388 ($25,500) and $0, respectively.
The Company obtained a line of credit of RMB 3,200,000 (approximately $0.5 million) from China CITIC Bank in September 2020 and obtained an advance of RMB 2,343,340 (approximately $0.3 million), and the remaining of RMB 856,660 (approximately $0.1 million) in October under this line. The loan bears interest at the rate of 4.50% per annum. The line of credit is due in one year on the anniversary date of the advance. In addition, the Company’s Chief Executive Officer and Chair of the Board personally guaranteed the new line of credit and pledged personal assets as collateral for the loan. Total interest for the year ended December 31, 2020 was RMB33,723 ($5,168).
Principal payments required for the remaining
terms of the loan facility and the lines of credit for the years ended December 31, are as follows:
Fair Value of Construction Loan Facility
and Lines of Credit - 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 December 31, 2020 and December 31,
2019 approximated their 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 years ended December 31, 2020 and 2019, operating lease cost
was $96,552 and $90,306, respectively and cash paid for amounts included in the measurement of lease liabilities for operating
cash flows from operating leases was $102,624 and $95,985, respectively. As of December 31, 2020 and December 31, 2019, the Company
reported operating lease right of use assets of $49,687 and $136,779, respectively and operating use liabilities of $52,070 and
$140,007, respectively. As of December 31, 2020, its operating leases had a weighted average remaining lease term of 0.52 years
and a weighted average discount rate of 4.75%.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Minimum lease payments for the Company’s operating lease
liabilities were as follows for the years ended December 31:
The Company has leases with terms of less than one year for
certain provincial sales offices that are not material.
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, 2020, the Company has not identified any uncertain tax positions
that it has taken. U.S. income tax returns for the years ended December 31, 2017 through December 31, 2020 and the Chinese income
tax return for the year ended December 31, 2020 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 years ended December 31, 2020 and 2019, respectively due to continued net losses of the Company.
Following is a reconciliation of income
taxes calculated at the federal statutory rates to the provision for income taxes:
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
The temporary differences which give rise
to the deferred income tax assets and liability are as follows:
As of December 31, 2020, the Company had
net operating loss carryforwards for PRC tax purposes of approximately $37.8 million which are available to offset any future taxable
income through 2026. Approximately $23.1 million of loss carryforwards expired in December 2020. The Company also has net operating
losses for United States federal income tax purposes of approximately $6.7 million of which $5.1 million are available to offset
future taxable income, if any, through 2039, and $1.6 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 December 31, 2020 and 2019. Therefore, the Company provided for a valuation allowance against its deferred tax assets of $27,666,557 and $30,738,262 as of December 31, 2020 and 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.
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.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
The Company uses fair value to measure
the value of the banker’s acceptance notes it holds at December 31, 2020 and 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:
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.
According to relevant PRC laws, companies
registered in the PRC, including the Company’s PRC subsidiary, Helpson, are required to allocate at least 10% of their after
tax income, as determined under the accounting standards and regulations in the PRC, to statutory surplus reserve accounts until
the reserve account balances reach 50% of the company’s registered capital prior to their remittance of funds out of the
PRC. Allocations to these reserves and funds can only be used for specific purposes and are not transferrable to the parent company
in the form of loans, advances or cash dividends. The amount designated for general and statutory capital reserves is $8,145,000
for each of the fiscal years ended December 31, 2020 and 2019.
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 shall be 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 December 31, 2019, there were 175,000 shares of restricted stock granted and outstanding under the Plan. No options
were outstanding as of December 31, 2019 under the Plan.
On December 23, 2020 the Board approved
the issuance of 2,000,000 shares of common stock from the Company’s 2010 Long-Term Incentive Plan, as amended for the partial
conversion of unpaid compensation totaling $864,480 to the Chairperson, Chief Executive Officer and Interim Chief Financial Officer
as discussed in Note 6. There were no securities issued from the Plan during the year ended December 31, 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 years ended
December 31, 2020 and 2019.
As of December 31, 2020, there was no remaining
unrecognized compensation expense related to stock options or restricted stock grants.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
NOTE 13 - REVENUE
The following table summarizes the Company’s
revenues disaggregated by revenue source and geography based on the Company’s PRC based business locations:
NOTE 14 - RISKS & UNCERTAINTIES
Current vulnerability due to certain concentrations
For the year ended December 31, 2020, one customer accounted for 16.0% of sales and three customers respectively accounted for 52.0%, 11.2% and 10.2% of accounts receivable. Three suppliers respectively accounted for 20.7%, 17.75 and 13.5% of raw material purchases, and three different products respectively accounted for 32.6%, 19.9% and 16.0% of revenue.
For the year ended December 31, 2019, no
customer accounted for more than 10% of sales and two customers accounted for 49.6% and 10.7% of accounts receivable. Three suppliers
accounted for 22.3%, 20.6% and 5.8% of raw material purchases, and three different products accounted for 33%, 21% and 17% of revenue.
Nature of Operations
Impact from the New Coronavirus Global
Pandemic (“COVID-19”) - The current outbreak of COVID-19 could have a material and adverse effect on the Company’s
business operations. These could include disruptions or restrictions on the Company’s ability 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 the Company’s 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.
Foreign Currency Risk - The
Company is exposed to foreign currency risk related to its operations. All of the Company’s revenue and the majority of expenses
are 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. The Company has not entered into any forward contracts or derivative instruments mitigating this risk.
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.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
NOTE
15 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENT
The condensed parent company only financial information for
China Pharma Holdings Inc. is presented below:
Condensed Comparative Balance Sheets
The parent company had no contingencies, long-term obligations and guarantees as of December 31, 2020 and 2019.
CHINA
PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Condensed Comparative Schedule of Operations
Condensed Comparative Schedule of Cash Flows