The accompanying notes are an integral part of these
condensed consolidated financial statements.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
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 March 31, 2022, the Company had cash and cash
equivalents of $3.7 million and an accumulated deficit of $33.3 million. The Company’s Chairperson, Chief Executive Officer and
Interim Chief Financial Officer has advanced an aggregate of $1,202,472 at March 31, 2022 to provide working capital and enable the Company
to make the required payments related to its prior 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 costs. 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.
While the current plans will allow the Company to fund its operations in the next twelve months, there can be no assurance that the Company
will be able to achieve its future strategic alternatives raising substantial doubt about its ability to continue as a going concern.
Pursuant to the requirements of Accounting Standards
Codification (ASC) 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern management
must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s
ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially
does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of
the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating
effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating
effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented
within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will
mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
within one year after the date that the financial statements are issued.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
Under ASC 205-40, the strategic alternatives being
pursued by the Company cannot be considered probable at this time because none of the Company’s current plans have been finalized
at the time of the issuance of these financial statements and the implementation of any such plan is not probable of being effectively
implemented as none of the plans are entirely within the Company’s control. Accordingly, substantial doubt is deemed to exist about
the Company’s ability to continue as a going concern within one year after the date these financial statements are issued.
The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in
the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described
above.
Consolidation and Basis of Presentation –
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) and are expressed in United States dollars. The accompanying condensed consolidated
financial statements include the accounts and operations of the Company including its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in the consolidation.
Helpson’s functional currency is the Chinese
Renminbi. Helpson’s revenue and expenses are translated into United States dollars at the average exchange rate for the period.
Assets and liabilities are translated at the exchange rate as of the end of the reporting period. Gains or losses from translating Helpson’s
financial statements are included in accumulated other comprehensive income, which is a component of stockholders’ equity. Gains
and losses arising from transactions denominated in a currency other than the functional currency of the entity that is party to the transaction
are included in the results of operations.
In the opinion of management, the unaudited interim
condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation
of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated on consolidation.
However, the results of operations included in such financial statements may not necessary be indicative of annual results. Such financial
statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the
“SEC”) on March 30, 2022 (“the 2021 Annual Report”).
Accounting Estimates - The
methodology used to prepare the Company’s financial statements is in conformity with U.S. GAAP, which requires the management of
the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
periods. Therefore, actual results could differ from those estimates.
The Company uses the same accounting policies in preparing
its quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated
financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
Loss Per Share
- Basic loss per share is calculated by dividing loss available to common stockholders by the weighted-average number of shares of
common stock outstanding, excluding unvested stock. Diluted loss per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential
common shares, including unvested stock, had been issued and if the additional common shares were dilutive.
The potentially dilutive
common shares related to the Convertible, redeemable note payable of 12,493,690 and 11,975,447 as of March 31, 2022 and December 31, 2021
as discussed in Note 8, respectively, and the option to purchase 65,000 shares of common stock as of March 31, 2022 and December 31, 2021
are excluded from the computation of diluted net loss per share for all periods presented because the effect is anti-dilutive due to net
losses of the Company.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
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 smaller reporting company 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 2020, the Financial Accounting Standards Board
issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,
to address the complexity in accounting for certain financial instruments with characteristics of liabilities and equity. Amongst other
provisions, the amendments in this ASU significantly change the guidance on the issuer’s accounting for convertible instruments
and the guidance on the derivative scope exception for contracts in an entity’s own equity such that fewer conversion features will
require separate recognition, and fewer freestanding instruments, like warrants, will require liability treatment. The pronouncement will
be effective for public business entities that are SEC smaller reporting company filers in fiscal years beginning after December
15, 2023, 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, 2020, including interim periods within those fiscal years. The Company adopted the standard
during fiscal 2021.
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.
NOTE 2 – INVENTORY
Inventory consisted of the following:
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Raw materials | |
| 2,280,072 | | |
| 2,131,584 | |
Work in process | |
| 476,631 | | |
| 622,380 | |
Finished goods | |
| 1,149,692 | | |
| 585,722 | |
Total Inventory | |
$ | 3,906,394 | | |
$ | 3,339,686 | |
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Permit of land use | |
$ | 443,697 | | |
$ | 441,783 | |
Building | |
| 10,303,326 | | |
| 10,258,885 | |
Plant, machinery and equipment | |
| 30,249,997 | | |
| 30,122,235 | |
Motor vehicle | |
| 338,836 | | |
| 337,375 | |
Office equipment | |
| 280,893 | | |
| 278,892 | |
Total | |
| 41,616,749 | | |
| 41,439,170 | |
Less: accumulated depreciation | |
| (28,984,711 | ) | |
| (28,158,611 | ) |
Property, plant and equipment, net | |
$ | 12,632,038 | | |
$ | 13,280,559 | |
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets as follows:
Asset | |
Life - years |
Permit of land use | |
40 - 70 |
Building | |
20 - 49 |
Plant, machinery and equipment | |
5 - 10 |
Motor vehicle | |
5 - 10 |
Office equipment | |
3-5 |
Depreciation relating to office equipment was included
in general and administrative expenses, while all other depreciation was included in cost of revenue. Depreciation expense was $703,877
and $690,707 for the three months ended March 31, 2022 and 2021, respectively.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the cost of medical formulas
approved for production by the NMPA. The Company did not obtain NMPA production approval for any new medical formulas during the three
months ended March 31, 2022 and 2021 and no costs were reclassified from advances to intangible assets during the three months ended March
31, 2022 and 2021, 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 $9,680 and $9,480 for the three months ended March 31, 2022 and 2021, respectively, which was included in the general and administrative
expenses. Medical formulas typically do not have a residual value at the end of their amortization period.
The Company evaluates each approved medical formula
for impairment at the date of NMPA approval, when indications of impairment are present and also at the date of each financial statement.
The Company’s evaluation is based on an estimated undiscounted net cash flow model, which considers currently available market data
for the related drug and the Company’s estimated market share. If the carrying value of the medical formula exceeds the estimated
future net cash flows, an impairment loss is recognized for the excess of the carrying value over the fair value of the medical formula,
which is determined by the estimated discounted future net cash flows. No impairment loss was recognized during the three months ended
March 31, 2022 and 2021.
Intangible assets consisted solely of NMPA approved
medical formulas as follows:
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Gross carrying amount | |
$ | 5,317,829 | | |
$ | 5,294,892 | |
Accumulated amortization | |
| (5,179,031 | ) | |
| (5,147,051 | ) |
Net carrying amount | |
$ | 138,798 | | |
$ | 147,841 | |
NOTE 5 – OTHER PAYABLES
Other Payables consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Compensation payable to officer |
|
$ |
719,506 |
|
|
$ |
715,506 |
|
Compensation and interest to related parties |
|
|
338,419 |
|
|
|
327,033 |
|
Business taxes and other |
|
|
699,136 |
|
|
|
841,622 |
|
Total Other Payables |
|
$ |
1,757,061 |
|
|
$ |
1,884,161 |
|
NOTE 6 – RELATED PARTY TRANSACTIONS
A member of the Company’s board of directors
(“Board”) had previously advanced to the Company an aggregate amount of $1,354,567 as of March 31, 2022 and December 31, 2021
which is recorded as “Borrowings from related parties” on the accompanying condensed consolidated balance sheets. The advances
bear interest at a rate of 1.0% per year. Total interest expense for each of the three months ended March 31, 2022 and 2021
was $3,386 and $3,386, respectively. Compensation and interest payable to the board member is included in “Other payables”
in the accompanying condensed consolidated balance sheet totaling $338,414 and $327,033 as of March 31, 2022 and December 31, 2021, respectively.
The Company repaid $236,206 of the advances during
the three months ended March 31, 2022 from its Chairperson, Chief Executive Officer and Interim Chief Financial Officer. Total amounts
owed were $1,202,872 and $1,183,414 and are recorded as “Borrowings from related parties” on the accompanying condensed consolidated
balance sheets as of March 31, 2022 and December 31, 2021, respectively. On July 8, 2019 the Company entered into a loan agreement in
exchange for cash of RMB 4,770,000 ($738,379) 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 and further extended to July 9, 2022 on identical terms. Total interest expense related to the loan for the three months
ended March 31, 2022 and 2021 was $7,669 and $7,510, respectively. Compensation payable to the Chairperson, Chief Executive Officer and
Interim Chief Financial Officer is included in “Other payables” in the accompanying condensed consolidated balance sheet totaling
$719,506 and $715,506 as of March 31, 2022 and December 31, 2021, respectively.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
NOTE 7 – 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) was advanced in April 2020, and RMB 3,000,000 (approximately $0.4 million) was 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 Bank of China.
In addition, the Company’s Chief Executive Officer and Chair of the Board personally guaranteed the new line of credit. The Company
has remaining 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 three months ended March 31, 2022 and 2021 was $9,445 and
$11,967, respectively. The Company repaid RMB 300,000 (approximately $0.05 million) during the three months ended March 31, 2022 as per
the repayment 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), all of which has 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. On June 21, 2021 the Company paid the balance in full. On June 25, 2021 the Company entered
into a new loan bearing an interest rate of 4.17%. 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 three months ended March 31, 2022 and 2021 was $13,954 and
$13,272, 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 2020 under this line. The loan bears interest at the rate of
4.50% per annum. In September 2021, the Company repaid the line of credit in full, Also in September 2021, the Company entered into a
new line a credit in the amount of RMB 3,200,000 (approximately $0.8 million) on the same terms. The line of credit is due on September
2, 2022. 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 three months ended March 31, 2022 and 2021 was $5,669 and
$5,552, respectively.
On September 18, 2021 the Company obtained a line
of credit for RMB 10,000,000 (approximately $1.54 million) with Bank of China. The loan bears interest at the rate of 3.85% per annum.
The line of credit is due September 18, 2022. The loan is collateralized by the Company’s new production facility and the included
production line equipment and machinery. In addition, the Company’s Chief Executive Officer and Chair of the Board personally guaranteed
the new line of credit. Total interest for the three months ended March 31, 2022 and 2021 was $15,157 and $0, respectively.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
Principal payments required for the remaining terms
of the loan facility and lines of credit as of March 31, 2022 are as follows:
Year | |
Lines of
Credit | |
2022 | |
$ | 4,300,432 | |
| |
$ | 4,300,432 | |
Fair Value of 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 lines of credit outstanding as of March 31, 2022 and December 31, 2021 approximated their fair values because the underlying instruments
bear an interest rate that approximates current market rates.
NOTE 8 – CONVERTIBLE NOTE
PAYABLE
On November
17, 2021, the Company entered into a Securities Purchase Agreement (the “Agreement”) pursuant to which the Company issued
an unsecured convertible promissory note (the “Note”) to an institutional accredited investor Streeterville Capital, LLC (the
“Investor”). The Note matures fifteen months after the purchase price of the Note is delivered from the Investor
to the Company (the “Purchase Price Date”). The Note has the original principal amount of $5,250,000 and Investor gave
consideration of $5,000,000, reflecting original issue discount of $250,000. The transaction contemplated under the Agreement was closed
on November 19, 2021 and the Company has been using the proceeds for general working capital purposes.
The Note balance
of $4,950,000 as of March 31, 2022 is convertible into 3,300,000 shares of the Company’s common stock at a price of $1.50 per
share through April 19, 2022. Thereafter, the Note is convertible into 1,650,000 shares at a price of $3.00 per share.
Interest accrues
on the outstanding balance of the Note at 5% per annum compounded daily. Upon the occurrence of an Event of Default as defined in the
Note, interest accrues at the lesser of 22% per annum or the maximum rate permitted by applicable law. In addition, upon any Event of
Default, the Investor may accelerate the outstanding balance payable under the Note, which will increase automatically upon such acceleration
by 15% or 5%, depending on the nature of the Event of Default.
Pursuant to
the terms of the Agreement and the Note, the Company must obtain Investor’s consent for certain fundamental transactions such as
consolidation, merger with or into another entity (excerpt for a reincorporation merger), disposition of substantial assets, change of
control, reorganization or recapitalization. Any occurrence of a fundamental transaction without Investor’s prior written consent
will be deemed an Event of Default.
Investor may
redeem all or any part the outstanding balance of the Note, subject to $500,000 per calendar month, at any time after one hundred
twenty-one (121) days from the Purchase Price Date upon three trading days’ notice, in cash or converting into shares of the Company’s
common stock, at a price equal to 85% multiplied by the lowest daily volume weighted average price during the ten trading days immediately
preceding the applicable redemption conversion, subject to certain adjustments and ownership limitations specified in the Note. The Note
provides for liquidated damages upon failure to comply with any of the terms or provisions of the Note. The Company may prepay the outstanding
balance of the Note with the Investor’s consent. At inception, the Note was redeemable into 8,811,430 shares based on
the lowest volume weighted average price of $0.595817 on the inception date of November 19, 2021. As of March 31, 2022 and December
31, 2021, the Note was redeemable into 12,493,690 and 11,975,447 shares of common stock, respectively based on the lowest volume
weighted average price of $0.3962 and $0.4384 on those dates, respectively.
Total interest
expense for the three months ended March 31, 2022 and 2021 was $67,686 and $0, respectively.
On March 21,
2022 the Investor delivered its notice of redemption for $100,000 of the Note and related interest at the price of $0.3113, which
was 85% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion.
Accordingly, the Company issued a total of 321,233 shares of common stock to the Investor on March 23, 2022.
On March 30,
2022 the Investor delivered its notice of redemption for $200,000 of the Note and related interest at the price of $0.3129, which
was 85% of the lowest volume weighted average price during the ten trading days immediately preceding the applicable redemption conversion.
Accordingly, the Company issued a total of 639,181 shares of common stock to the Investor on March 31, 2022.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
NOTE 9 - LEASES
The Company has leases for certain office and production
facilities in the PRC which are classified as operating leases. The leases contain payment terms for fixed amounts. Options to extend
are recognized as part of the lease liabilities and recognized as right to use assets when management estimates to renew the lease. There
are no residual value guarantees, no variable lease payments, and no restrictions or covenants imposed by leases. The discount rate used
in measuring the lease liabilities and right of use assets was determined by reviewing the Company’s incremental borrowing rate
at the initial measurement date. For the three months ended March 31, 2022 and 2021, operating lease cost was $21,419 and $23,968, respectively
and cash paid for amounts included in the measurement of lease liabilities for operating cash flows from operating leases was $22,495
and $25,475, respectively. As of March 31, 2022 and December 31, 2021, the Company reported operating lease right of use assets of $107,094
and $127,958, respectively and operating use liabilities of $108,990 and $129,462, respectively. As of March 31, 2022, its operating leases
had a weighted average remaining lease term of 1.25 years and a weighted average discount rate of 4.75%.
Minimum lease payments for the Company’s operating lease liabilities
were as follows for the twelve month periods ended March 31:
2023 | |
$ | 89,978 | |
2024 | |
| 22,494 | |
Total undiscounted cash flows | |
| 112,472 | |
Less: Imputed interest | |
| (3,482 | ) |
| |
| 108,990 | |
Less: Operating lease liabilities, current portion | |
| (86,672 | ) |
Operating lease liabilities, net of current portion | |
$ | 22,318 | |
The Company has leases with terms 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, 2021, 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, 2021 and the Chinese income tax return for the year ended December
31, 2021 are open for possible examination.
Under the current tax law in the PRC, the Company is and will be subject
to the enterprise income tax rate of 25%.
There was no provision for income taxes for the three
months ended March 31, 2022 and 2021, respectively due to continued net losses of the Company.
As of March 31, 2022, the Company had net operating
loss carryforwards for PRC tax purposes of approximately $23.8 million which are available to offset any future taxable income through
2027. Approximately $4.4 million of these carryforwards will expire in December 2022. The Company also has net operating losses for United
States federal income tax purposes of approximately $8.0 million of which $5.1 million is available to offset future taxable income, if
any, through 2039, and $2.9 million are available for carryforward indefinitely subject to a limitation of 80% of taxable income for each
tax year.
U.S. federal tax legislation, commonly referred to
as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform significantly
modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35%
to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S.
to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign
earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends
from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
differences become deductible or tax loss carry forwards are utilized. Management considers projected future taxable income
and tax planning strategies in making this assessment. Based upon an assessment of the level of historical taxable income and
projections for future taxable income over the periods on which the deferred tax assets are deductible or can be utilized, management
believes it is not likely for the Company to realize all benefits of the deferred tax assets as of March 31, 2022 and December 31, 2021. Therefore,
the Company provided for a valuation allowance against its deferred tax assets of $24,318,296 and $23,982,509 as of March 31, 2022 and
December 31, 2021, respectively.
The Company also incurred various other taxes, comprised
primarily of business taxes, value-added taxes, urban construction taxes, education surcharges and others. Any unpaid amounts are reflected
on the balance sheets as accrued taxes payable.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
NOTE 11 – FAIR VALUE MEASUREMENTS
Fair value is defined as
the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value,
a hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows: Level 1 – Quoted
prices in active markets for identical assets or liabilities; Level 2 – Observable inputs other than Level 1 including quoted prices
for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable
market data; and Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is
determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination
of fair value requires significant management judgment or estimation.
The Company uses fair value
to measure the value of the banker’s acceptance notes it holds at March 31, 2022 and December 31, 2021. The banker’s acceptance notes
are recorded at cost which approximates fair value. The Company held the following assets and liabilities recorded at fair
value:
| |
| | |
Fair Value Measurements at | |
| |
March 31, | | |
Reporting Date Using | |
Description | |
2022 | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Banker’s acceptance notes | |
$ | 14,146 | | |
$ | - | | |
$ | 14,146 | | |
$ | - | |
Total | |
$ | 14,146 | | |
$ | - | | |
$ | 14,146 | | |
$ | - | |
| |
| | |
Fair Value Measurements at | |
| |
December 31, | | |
Reporting Date Using | |
Description | |
2021 | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Banker’s acceptance notes | |
$ | 91,362 | | |
$ | - | | |
$ | 91,362 | | |
$ | - | |
Total | |
$ | 91,362 | | |
$ | - | | |
$ | 91,362 | | |
$ | - | |
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 as of March 31, 2022 and December 31, 2021.
2022 Share Issuances
On March 21,
2022 the Investor as discussed in Note 8 delivered its notice of redemption for $100,000 of the Note and related interest at the
lowest volume weighted average price of $0.3113 during the ten trading days immediately preceding the applicable redemption conversion.
Accordingly, the Company issued a total of 321,233 shares of common stock to the Investor on March 23, 2022.
On March 30,
2022 the Investor as discussed in Note 8 delivered its notice of redemption for $200,000 of the Note and related interest at the
lowest volume weighted average price of $0.3129 during the ten trading days immediately preceding the applicable redemption conversion.
Accordingly, the Company issued a total of 639,181 shares of common stock to the Investor on March 31, 2022.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (UNAUDITED)
2010 Incentive Plan
On November
12, 2010, the Company’s Board adopted the Company’s 2010 Incentive Plan (the “Plan”), which was then approved
by stockholders on December 22, 2010. On October 17, 2019, the Board of Directors approved the First Amendment to the 2010 Incentive Plan
(the “Amendment”), pursuant to which the term of the 2010 Incentive Plan was extended to December 31, 2029. The Amendment
was adopted by the stockholders on December 19, 2019. On October 25, 2021, the Board of Directors approved, and on December 27, 2021 our
stockholders adopted the Amendment No.2 to the Plan to increase the number of shares of the Common Stock, that are reserved thereunder
by 5,000,000 shares from 4,000,000 shares to 9,000,000 shares. 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 9,000,000 shares of common stock. Through March 31, 2022, there were 3,935,000 shares of stock granted
and outstanding under the Plan. A total of 65,000 options were outstanding as of March 31, 2022 under the Plan. As such,
there are 5,000,000 additional shares available for issuance under the Plan.
As of March 31, 2022, there was no remaining unrecognized
compensation expense related to stock options or restricted stock grants.
NOTE 13 – RISKS & UNCERTAINTIES
Current vulnerability due to certain concentrations
For the three months ended March 31, 2022, no customer
accounted for more than 10% of sales and three customers accounted for 53.0%, 11.4% and 10.4% of accounts receivable. Two suppliers accounted
for 29.2% and 28.4% of raw material purchases, and three different products accounted for 32.5%, 29.4% and 12.7% of revenue.
For the three months ended March 31, 2021, no customer accounted for more than 10% of sales and three customers accounted for 51.9%, 11.2%
and 10.2% of accounts receivable. Two suppliers accounted for 45.1% and 20.1% of raw material purchases, and three different products
accounted for 32.0%, 27.0% and 11.7% of revenue.
Nature of Operations
Impact from the New Coronavirus
Global Pandemic (“COVID-19”) - The current outbreak of COVID-19 since the first quarter 2020 had a material and adverse
effect on the Company’s business operations. These included, but are not limited to, disruptions or restrictions on its ability
to travel or to distribute its products, as well as temporary closures of its facilities or the facilities of the suppliers or customers.
Through strict prevention and quarantine measures, China has effectively controlled the COVID-19 outbreak and returned to normal production
and social life in an orderly manner. However, due to the deterioration of this pandemic in other countries, such as India, we still need
to be on high alert on any potential risks, and China itself, is facing with the frequent resurgence in multiple metropolitans. Any disruption
or delay of the Company’s suppliers or customers in the future would likely impact its sales and operating results. In addition,
COVID-19 has resulted in a widespread health crisis that could continue to adversely affect the economies and financial markets of China
and many other countries, resulting in an economic downturn that could significantly impact our operating results.
Economic environment - Substantially all of
the Company’s operations are conducted in the PRC, and therefore the Company is subject to special considerations and significant
risks not typically associated with companies operating in the United States of America. These risks include, among others, the political,
economic and legal environments and fluctuations in the foreign currency exchange rate. The Company’s results from operations may
be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among
other things. The unfavorable changes in global macroeconomic factors may also adversely affect the Company’s operations.
In addition, all of the Company’s revenue is denominated
in the PRC’s currency of Renminbi (RMB), which must be converted into other currencies before remittance out of the PRC. Both the conversion
of RMB into foreign currencies and the remittance of foreign currencies abroad require approval of the PRC government.