The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(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, 2023, the Company had cash and
cash equivalents of $1.2 million and an accumulated deficit of $36.7 million. The Company’s Chairperson, Chief Executive Officer
and Interim Chief Financial Officer has advanced an aggregate of $1,142,870 as of March 31, 2023 to provide working capital and enable
the Company to make the required payments related to its former 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.
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(UNAUDITED)
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.
Reverse Stock Split – Effective
March 6, 2023, the Company implemented a 1-for -10 reverse stock split as more fully discussed in Note 14. All share and per share disclosures
have been retroactively restated to reflect the impact of the reverse stock split.
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 and 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, 2022 filed with the Securities and Exchange Commission (the
“SEC”) on March 30, 2023 (“2022 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 9,856,070 and 3,836,070 at March 31, 2023 and December 31, 2022
as discussed in Note 8, respectively, and the option to purchase 66,500 shares of common stock at March 31, 2023 and December 31, 2022
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.
Recent Accounting Pronouncements
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(UNAUDITED)
NOTE 2 – INVENTORY
Inventory consisted of the following:
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Raw materials | |
| 2,179,234 | | |
| 1,839,641 | |
Work in process | |
| 319,059 | | |
| 557,146 | |
Finished goods | |
| 1,262,187 | | |
| 551,000 | |
Total Inventory | |
$ | 3,760,480 | | |
$ | 2,947,787 | |
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Permit of land use | |
$ | 409,895 | | |
$ | 404,427 | |
Building | |
| 9,518,398 | | |
| 9,391,433 | |
Plant, machinery and equipment | |
| 28,138,831 | | |
| 27,780,585 | |
Motor vehicle | |
| 405,617 | | |
| 438,138 | |
Office equipment | |
| 313,023 | | |
| 308,847 | |
Total | |
| 38,785,764 | | |
| 38,323,430 | |
Less: accumulated depreciation | |
| (29,356,174 | ) | |
| (28,350,365 | ) |
Property, plant and equipment, net | |
$ | 9,429,590 | | |
$ | 9,973,065 | |
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
$624,721 and $703,877 for the three months ended March 31, 2023 and 2022, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the cost of medical
formulas approved for production by the NMPA and the intellectual property acquired in November 2022 relative to the creation of an ophthalmic
oxygen enriched atomization therapeutic instrument, which has a utility model patent (the “Utility Model Patent”) and applied
for an invention patent (the “Invention Patent”) . The Company did not obtain NMPA production approval for any new medical
formulas during the three months ended March 31, 2023 and 2022 and no costs were reclassified from advances to intangible assets during
the three months ended March 31, 2023 and 2022, 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 $55,161 and $9,680 for the three months ended March 31, 2023 and 2022, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(UNAUDITED)
The Company will pay a service fee of 15% of
the net profit of the corresponding product sales revenue, which will be paid in cash annually after it launches to the market, contingent
on the successful authorization of the above mentioned Invention Patent. There were no service fees paid for the three months ended March
31, 2023 and 2022, respectively.
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, 2023 and 2022.
Intangible assets consisted of NMPA approved
medical formulas, a Utility Model Patent and an Invention Patent as follows:
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Gross carrying amount | |
$ | 6,692,217 | | |
$ | 6,554,628 | |
Accumulated amortization | |
| (4,866,288 | ) | |
| (4,747,142 | ) |
Net carrying amount | |
$ | 1,825,929 | | |
$ | 1,807,486 | |
NOTE 5 – OTHER PAYABLES
Other Payables consisted of the following:
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Compensation payable to officer | |
$ | 955,506 | | |
$ | 951,506 | |
Compensation and interest to related parties | |
| 363,964 | | |
| 372,578 | |
Business taxes and other | |
| 851,882 | | |
| 1,065,979 | |
Total Other Payables | |
$ | 2,171,352 | | |
$ | 2,390,063 | |
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, 2023 and December 31,
2022 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, 2023
and 2022 was $3,387 and $3,387, respectively. Compensation and interest payable to the board member is included in Other payables in
the accompanying condensed consolidated balance sheet totaling $363,964 and $372,578 as of March 31, 2023 and December 31, 2022, respectively.
The Company had previously received advances
from its Chairperson, Chief Executive Officer and Interim Chief Financial Officer. Total amounts owed were $1,142,870 and $1,121,273
and are recorded as “Borrowings from related parties” on the accompanying condensed consolidated balance sheets as of March
31, 2023 and December 31, 2022, 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 was payable within one year of the loan agreement. The due date of the loan agreement has been extended annually on identical terms,
and is due July 9, 2023. Total interest expense related to the loan for the three months ended March 31, 2023 and 2022 was $7,112 and
$7,669, 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 $955,506 and $951,506 as of March 31,
2023 and December 31, 2022, respectively.
CHINA
PHARMA HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
MONTHS ENDED MARCH 31, 2023 AND 2022 (UNAUDITED)
NOTE
7 –LINES OF CREDIT
On
June 25, 2021 the Company entered into a new loan bearing an interest rate of 4.17%. The Company paid all principal and interest on June
21, 2022 and on June 22, 2022 entered into a loan for the same principal amount bearing interest at 4.17% and due December 21, 2022.
On December 21, 2022 the Company repaid the loan in full and entered into a new line of credit for an aggregate amount of RMB 7,300,000
(approximately $1.0 million) with interest payable monthly at a rate of 3.9%. The line of credit is payable on December 20, 2023. The
Company received an advance on the line of credit in the amount of RMB 3,800,000 (approximately $0.56 million) on December 30, 2022.
On February 24, 2023 the Company received an advance on the line in the amount of RMB 3,500,000 (approximately $0.51 million). The Company
has no further availability on this 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 under this facility
for the three months ended March 31, 2023 and 2022 was $6,254 and $13,954, respectively.
In
September 2021, the Company entered into a line of credit in the amount of RMB 3,200,000 (approximately $0.8 million). The loan bears
interest at the rate of 4.50% per annum. The line of credit was paid in full on September 6, 2022. On September 9, 2022, the Company
received a new line of credit in the same amount. The loan bears interest at a rate of 4.5% and is due on September 7, 2023. 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, 2023 and 2022 was $5,257 and $5,669, 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 was paid in full on the due date of September 18, 2022. On September
30, 2022 the Company received a new line of credit in the same amount. The loan bears interest at the rate of 3.45% and is due September
28, 2023. 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, 2023 and 2022 was $12,596 and $15,157, respectively.
Principal
payments required for the remaining terms of the loan facility and lines of credit as of March 31, 2023 are as follows:
Year | |
Lines
of Credit | |
2023 | |
$ | 2,983,250 | |
| |
$ | 2,983,250 | |
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, 2023 and December 31, 2022 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 transaction contemplated under the Agreement was closed on November 19, 2021. The Note matured
on February 17, 2023. On April 13, 2023 the Company entered into an Amendment (the “Amendment”) with the Investor which extended
the maturity date of the Note to May 19, 2024 as further discussed in Note 14.
The Note was originally
convertible into 350,000 shares of the Company’s common stock at a price of $15.00 per share through April 19, 2022. Thereafter,
the Note was convertible into 175,000 shares at a price of $30.00 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.
CHINA
PHARMA HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
MONTHS ENDED MARCH 31, 2023 AND 2022 (UNAUDITED)
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 881,143 shares based on the lowest
volume weighted average price of $5.95817 on the inception date of November 19, 2021. As of March 31, 2023, the Note was convertible
into 9,856,070 shares of common stock based on 85% of the lowest volume weighted average price of $0.376 on that date.
Total
interest expense for the three months ended March 31, 2023 and 2022 was $46,018 and $67,686, respectively.
On
January 5, 2023 the Investor delivered its notice of redemption for $150,000 of the Note and related interest at the conversion
price of $0.763, 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 196,592 shares of common stock to the Investor
on January 6, 2023.
On
January 18, 2023 the Investor delivered its notice of redemption for $250,000 of the Note and related interest at the conversion
price of $0.763, 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 327,654 shares of common stock to the Investor
on January 19, 2023.
On
March 2, 2023 the Investor delivered its notice of redemption for $250,000 of the Note and related interest at the conversion
price of $0.575, 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 434,783 shares of common stock to the Investor
on March 9, 2023.
Subsequent
to March 31, 2023 the Investor delivered additional notices of redemption as discussed in Note 14.
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, 2023 and 2022, operating
lease cost was $19,787 and $22,195, respectively and cash paid for amounts included in the measurement of lease liabilities for
operating cash flows from operating leases was $20,781 and $23,327, respectively. As of March 31, 2023 and December 31, 2022, the
Company reported operating lease right of use assets of $19,787 and $39,096, respectively and operating use liabilities of $20,617 and
$40,445, respectively. As of March 31, 2023, its operating leases had a weighted average remaining lease term of 0.25 years and a weighted
average discount rate of 4.75%.
CHINA
PHARMA HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
MONTHS ENDED MARCH 31, 2023 AND 2022 (UNAUDITED)
Minimum
lease payments for the Company’s operating lease liabilities were as follows for the twelve month periods ended March 31:
2023 | |
$ | 20,781 | |
Total
undiscounted cash flows | |
| 20,781 | |
Less:
Imputed interest | |
| (164 | ) |
| |
| 20,617 | |
Less:
Operating lease liabilities, current portion | |
| (20,617 | ) |
Operating
lease liabilities, net of current portion | |
$ | - | |
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, 2022, the Company has not identified any uncertain tax positions that it has taken.
U.S. income tax returns for the years ended December 31, 2018 through December 31, 2022 and the Chinese income tax return for the year
ended December 31, 2022 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, 2023 and 2022, respectively due to continued net losses of the
Company.
As
of March 31, 2023, the Company had net operating loss carryforwards for PRC tax purposes of approximately $20.6 million which are available
to offset any future taxable income through 2028. Approximately $3.5 million of these carryforwards will expire in December 2023. The
Company also has net operating losses for United States federal income tax purposes of approximately $9.1 million of which $5.1 million
is available to offset future taxable income, if any, through 2039, and $4.0 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, 2023 and December 31, 2022. Therefore, the Company provided for a valuation allowance against its deferred
tax assets of $22,364,780 and $21,985,554 as of March 31, 2023 and December 31, 2022, 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, 2023 AND 2022 (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, 2023 and December 31, 2022. 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 | |
2023 | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Banker’s
acceptance notes | |
$ | 34,772 | | |
$ | - | | |
$ | 34,772 | | |
$ | - | |
Total | |
$ | 34,772 | | |
$ | - | | |
$ | 34,772 | | |
$ | - | |
| |
| | |
Fair
Value Measurements at | |
| |
December 31, | | |
Reporting
Date Using | |
Description | |
2022 | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Banker’s
acceptance notes | |
$ | 13,784 | | |
$ | - | | |
$ | 13,784 | | |
$ | - | |
Total | |
$ | 13,784 | | |
$ | - | | |
$ | 13,784 | | |
$ | - | |
NOTE
12 - STOCKHOLDERS’ EQUITY
The
Company is authorized to issue 500,000,000 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 at March 31, 2023 and December 31, 2022.
Effective
March 6, 2023 the Company implemented a 1-for-10 reverse split of its common stock. The reverse stock split was approved by the Company’s
Board of Directors through unanimous written consent and the Company’s stockholders at its Annual Meeting for the fiscal year ended
on December 31, 2021, which was held on December 27, 2022. Upon the effectiveness of the reverse stock split, every 10 shares of the
Company’s issued and outstanding common stock were automatically converted into one share of issued and outstanding common stock.
No fractional shares were issued as a result of the reverse stock split. Instead, any fractional shares that resulted from the split
were rounded up to the next whole number. The reverse stock split affects all stockholders uniformly and does not alter any stockholder’s
percentage interest in the Company’s outstanding common stock, except for adjustments that may result from the treatment of fractional
shares. All share and per share amounts have been retroactively restated for all periods presented in the accompanying unaudited condensed
consolidated financial statements.
2023
Share Issuances
On
January 5, 2023 the Investor as discussed in Note 8 delivered its notice of redemption for $150,000 of the Note and related
interest at the conversion price of $0.763, 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 196,592 shares of common
stock to the Investor on January 6, 2023.
CHINA
PHARMA HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
MONTHS ENDED MARCH 31, 2023 AND 2022 (UNAUDITED)
On
January 18, 2023 the Investor as discussed in Note 8 delivered its notice of redemption for $250,000 of the Note and related
interest at the conversion price of $0.763, 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 327,654 shares of common
stock to the Investor on January 19, 2023.
On
March 2, 2023 the Investor as discussed in Note 8 delivered its notice of redemption for $250,000 of the Note and related interest
at the conversion price of $0.575, 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 434,783 shares of common stock to the
Investor on March 9, 2023.
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 500,000 shares from 400,000 shares to 900,000 shares. On October 27, 2022 the Board of Directors approved and on December 27, 2022,
the stockholders adopted the Amended and Restated 2010 Long Term Incentive Plan to increase the number of shares of common stock that
are reserved thereunder by an additional 500,000 shares from 900,000 to 1,400,000. 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 1,400,000 shares of common stock. Through December 31, 2022, there were 490,000 shares of stock and stock options granted under
the Plan. A total of 66,500 options were outstanding as of March 31, 2023 under the Plan. As such, there are 910,000 additional
shares available for issuance under the Plan.
As
of March 31, 2023, 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, 2023, no
customer accounted for more than 10% of sales and three customers accounted for 52.6%, 11.3% and 10.3% of accounts receivable. Three suppliers
accounted for 25.2%, 15.7% and 11.4% of raw material purchases, and three different products accounted for 22.0%, 20.7% and 12.7% of revenue.
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.
Nature
of Operations
Impact
from the New Coronavirus Global Pandemic (“COVID-19”) - Although the outbreak of COVID-19 since the first quarter 2020
has been under control, and China has returned to normal production and social life in an orderly manner, China is still encountering
resurgences in its major cities. For now, these resurgences have not caused material impact to our daily operations, However, we cannot
ensure that any future resurgence will not cause substantial influence onto our business. If that happens, any disruption or delay of
the Company’s suppliers or customers in the future would likely impact its sales and 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.
CHINA
PHARMA HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
MONTHS ENDED MARCH 31, 2023 AND 2022 (UNAUDITED)
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.
NOTE
14 – SUBSEQUENT EVENTS
On
April 13, 2023 the Company entered into an Amendment (the “Amendment”) with the Investor which extended the maturity date
of the Convertible Note Payable as discussed in Note 8 to May 19, 2024. As consideration for the extension, the Company agreed to an
extension fee of $65,639, representing 2.0% of the balance of the Note and accrued interest on the date of the Amendment. The amount
was satisfied by increasing the Note balance by the amount of the extension fee. The Company will record this as additional interest
expense during the second quarter of 2023. In addition, the Company decreased the price at which the Investor can convert the balance
from 85% to 82% of the lowest daily volume weighted average price during the ten trading days immediately preceding the applicable redemption
conversion, and assumed an additional obligation to redeem a portion of the outstanding balance of the Note monthly or be subject to
additional penalty fees.
On April 7, 2023 the Investor discussed in Note
8 delivered its notice of redemption for $200,000 of the Note and related interest at the conversion price of $0.2808, 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 712,250 shares of common stock to the Investor on April 13, 2023.
On May 1, 2023 the Investor discussed in Note
8 delivered its notice of redemption for $150,000 of the Note and related interest at the conversion price of $0.2644, 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 567,322 shares of common stock to the Investor on May 4, 2023.