CHINA PHARMA HOLDINGS, INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - CHINA PHARMA HOLDINGS, INC.	Financial_Report.xls
EX-31.1 - CHINA PHARMA HOLDINGS, INC.	cphi10qex311033113.htm
EX-31.2 - CHINA PHARMA HOLDINGS, INC.	cphi10qex312033113.htm
EX-32.1 - CHINA PHARMA HOLDINGS, INC.	cphi10qex321033113.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2013

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ____________ to ____________

Commission File Number 001-34471

CHINA PHARMA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Nevada	73-1564807
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

Second Floor, No. 17, Jinpan Road

Haikou, Hainan Province, China 570216

(Address of principal executive offices) (Zip Code)

+86 898-6681-1730 (China)

(Issuer's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 43,579,557 shares of Common Stock, $.001 par value, were outstanding as of May 10, 2013.

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Page

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (Unaudited)	2

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	4

	Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23

Item 4.	Controls and Procedures	23

PART II OTHER INFORMATION

Item 6.	Exhibits	23

Signatures		24

Exhibits/Certifications

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying unaudited condensed consolidated balance sheets, statements of operations and comprehensive income, and statements of cash flows and the related notes thereto, have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by U.S. GAAP for complete financial statements. The financial statements reflect all adjustments, consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.

The accompanying financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.

The results of operations for the three-month period ended March 31, 2013 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	March 31,		December 31,
	2013		2012
ASSETS
Current Assets:
Cash and cash equivalents	$	4,750,468	$	4,029,708
Banker's acceptances		1,180,864		101,570
Trade accounts receivable, less allowance for doubtful
accounts of $4,333,411 and $4,429,945, respectively		62,697,675		66,175,570
Other receivables, less allowance for doubtful
accounts of $50,592 and $49,881, respectively		255,292		80,799
Advances to suppliers		5,119,729		4,816,354
Inventory, less allowance for obsolescence
of $1,779,729 and $1,769,984, respectively		33,260,226		36,359,516
Deferred tax assets		954,980		967,671
Total Current Assets		108,219,234		112,531,188

Advances for purchases of intangible assets		39,462,268		39,263,977
Property and equipment, net of accumulated depreciation of
$4,511,658 and $4,273,373, respectively		9,288,259		9,031,894
Intangible assets, net of accumulated amortization of
$3,097,224 and $2,944,726, respectively		2,289,851		2,412,854
TOTAL ASSETS	$	159,259,612	$	163,239,913

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable	$	2,978,636	$	2,841,862
Accrued expenses		240,003		202,185
Accrued taxes payable		514,245		2,426,826
Other payables		1,014,647		1,094,886
Advances from customers		1,735,917		1,945,984
Other payables - related parties		1,354,567		1,354,567
Short-term notes payable		4,787,285		4,761,073
Total Current Liabilities		12,625,300		14,627,383
Long-term deferred tax liability		110,286		95,963
Total Liabilities		12,735,586		14,723,346
Stockholders' Equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
no shares issued or outstanding		-		-
Common stock, $0.001 par value; 95,000,000 shares authorized;
43,579,557 shares and 43,579,557 shares outstanding, respectively		43,580		43,580
Additional paid-in capital		23,590,204		23,590,204
Retained earnings		106,092,017		108,904,325
Accumulated other comprehensive income		16,798,225		15,978,458
Total Stockholders' Equity		146,524,026		148,516,567
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	159,259,612	$	163,239,913

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
	For the Three Months
	Ended March 31,
	2013			2012
Revenue	$	8,249,387		$	16,086,731
Cost of revenue		6,125,400			10,782,384
Inventory obsolescence		3,692,895			-

Gross profit		(1,568,908	)		5,304,347

Operating expenses:
Selling expenses		812,054			894,060
General and administrative expenses		739,427			676,402
Bad debt expense		(119,930	)		320,098
Total operating expenses		1,431,551			1,890,560

(Loss) income from operations		(3,000,459	)		3,413,787

Other income (expense):
Interest income		1,586			690
Interest expense		(82,445	)		(77,537	)
Net other expense		(80,859	)		(76,847	)

(Loss) income before income taxes		(3,081,318	)		3,336,940
Income tax benefit (expense)		269,011			(530,581	)
Net (loss) income		(2,812,307	)		2,806,359
Other comprehensive income - foreign currency
translation adjustment		819,767			(407,517	)
Comprehensive (loss) income	$	(1,992,540	)	$	2,398,842
(Loss) earnings per share:
Basic	$	(0.06	)	$	0.06
Diluted	$	(0.06	)	$	0.06

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	For the Three Months
	Ended March 31,
	2013			2012
Cash Flows from Operating Activities:
Net (loss) income	$	(2,812,307	)	$	2,806,359
Depreciation and amortization		350,468			365,223
Stock based compensation		-			56,489
Bad debt expense		(119,930	)		320,098
Deferred income taxes		31,761			(34,312	)
Inventory obsolescence reserve		3,692,895			-
Changes in assets and liabilities:
Trade accounts receivable		589,186			(4,141,146	)
Other receivables		(173,763	)		(20,247	)
Advances to suppliers		(276,405	)		944,949
Inventory		1,890,843			(3,351,458	)
Trade accounts payable		122,430			2,725,945
Accrued expenses		(32,516	)		11,517
Accrued taxes payable		(1,922,780	)		443,684
Other payables		(11,715	)		54,337
Advances from customers		(220,418	)		219,942
Net Cash Provided by Operating Activities		1,107,749			401,380

Cash Flows from Investing Activities:
Net investment in banker's acceptances		-			(281,674	)
Advances for purchases of property and equipment
and intangible assets		(399,992	)		(790,092	)
Purchase of property and equipment		(4,373	)		(7,926	)
Net Cash Used in Investing Activities		(404,365	)		(1,079,692	)

Net Cash Provided by Financing Activity		-			-

Effect of Exchange Rate Changes on Cash		17,376			(52,736	)
Net Increase in Cash and Cash Equivalents		720,760			(731,048	)
Cash and Cash Equivalents at Beginning of Period		4,029,708			4,050,854
Cash and Cash Equivalents at End of Period	$	4,750,468		$	3,319,806

Supplemental Cash Flow Information:
Cash paid for interest	$	111,346		$	75,567
Cash paid for income taxes		1,593,510			274,587

Supplemental Noncash Investing and Financing Activities:
Accounts payable for purchases of property and equipment	$	151,064		$	144,057
Accounts receivable collected with banker's acceptances		3,366,655			406,604
Inventory purchased with banker's acceptances		2,289,690			406,604

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

Organization and Nature of Operations – China Pharma Holdings, Inc., a Nevada corporation, owns 100% of Onny Investment Limited (“Onny”), a British Virgin Islands corporation, that in turn owns 100% of Hainan Helpson Medical & Biotechnology Co., Ltd (“Helpson”), a corporation 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.

On December 31, 2012, China Pharma Holdings, Inc consummated a reincorporation merger for the purpose of changing the state of incorporation from Delaware to Nevada pursuant to the terms and conditions of an Agreement and Plan of Merger dated December 27, 2012. The reincorporation merger was approved by stockholders holding the majority of the outstanding common shares on December 21, 2012.

The Foreign Investment Industrial Catalogue (the “Catalogue”) jointly issued by the China’s Ministry of Commerce and the National Development and Reform Commission (as the latest version is the year 2012 version, effective January 30, 2012) classified various industries/businesses into three different categories: (i) encouraged for foreign investment; (ii) restricted to foreign investment; and (iii) prohibited from foreign investment. For any industry/business not covered by any of these three categories, they will be deemed industries/businesses permitted for foreign investment. A typical foreign investment ownership restriction in the pharmaceutical industry is that a foreign investment enterprise (the “FIE”) shall not have the whole or majority of its equity interests owned by a foreign owner if the FIE establishes more than 30 branch stores and distributes a variety of brands in those franchise stores, which is not the case of the Company’s business.

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 from Helpson’s three former shareholders on May 25, 2005 by entry into an Equity Transfer Agreement with such three parties on May 25, 2005. The transaction was approved by the Commercial Bureau of Hainan Province on June 12, 2005 and Helpson received the Certificate of Approval for Establishing of Enterprises with Foreign Investment in the PRC on the same day and its business license evidencing its WFOE (Wholly Foreign Owned Enterprise) status on June 21, 2005.

The Company has and continues to acquire well-accepted medical formulas to a diverse portfolio of Western and Chinese medicines.

Consolidation and Basis of Presentation – The accompanying 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 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 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 a party to the transaction are included in the results of operations.

Condensed Financial Statements – The accompanying unaudited condensed consolidated financial statements were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “Commission”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Management of the Company (“Management”) believes the following disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Commission on March 14, 2013.

These unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of Management, are necessary to present fairly the consolidated financial position and results of operations of the Company for the periods presented. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accounting Estimates - The preparation of financial statements in conformity with U.S. GAAP requires Management 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. Actual results could differ from those estimates.

Basic and Diluted Earnings per Common Share - Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated to give effect to potentially issuable dilutive common shares.

The following table is a presentation of the numerators and denominators used in the calculation of basic and diluted earnings per share:

	For the Three Months
	Ended March 31,
	2013			2012
Net (loss) income	$	(2,812,307	)	$	2,806,359
Basic weighted-average common shares outstanding		43,579,557			43,529,557
Effect of dilutive securities:
Warrants		-			-
Options		-			-
Diluted weighted-average common shares outstanding		43,579,557			43,529,557
Basic (loss) earnings per share	$	(0.06	)	$	0.06
Diluted (loss) earnings per share	$	(0.06	)	$	0.06

The following potential common shares were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive:

	For the Three Months
	Ended March 31,
	2013		2012
Warrants with exercise prices of $3.00 to $3.80 per share		150,000		150,000
Options with an exercise price of $2.54 to $3.47 per share		25,000		310,000
Total		175,000		460,000

NOTE 2 – PRODUCT RECALL

In March 2013, the China Food and Drug Administration (“CFDA”) issued a nationwide notice (the “CFDA Notice”) for the cessation of the production, sale and use of Buflomedil effective immediately. The CFDA Notice was a result of the reevaluation done by the CFDA based on the indications from the recent China and international research materials, which found the side effect risks of Buflomedil to nerve system and cardiovascular system have surpassed its clinical treatment effect. The CFDA Notice was applicable to all the manufacturers and distributers in China who are in the business of the production and sale of Buflomedil-related products.

Pursuant to the CFDA Notice, the Company ceased the production and sale of Buflomedil-based products and ceased all promotional and marketing activities for Buflomedil-based products.

Furthermore, the Company recognized an inventory obsolescence expense in the amount of $3,692,895 to write off Buflomedil-related raw materials and finished goods inventory. This was recorded as inventory obsolescence on the accompanying statement of operations for the three months ended March 31, 2013.

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In addition, the Company recalled Buflomedil-based products from the market. It authorized the return of its previously sold Buflomedil-related products through April 30, 2013. The loss from the refunds to customers was $21,507 and recognized that estimated loss as a reduction of revenues for the three months ended March 31, 2013. Under CFDA regulatory provisions, the CFDA notice does not impose legal liability to the manufacturers of Buflomedil as long as they act pursuant to the CFDA Notice to cease the production, sale and use of Buflomedil and destroy such finished goods immediately.

Pursuant to the CFDA Notice, the CFDA revoked the production licenses for Buflomedil based products. The carrying value of the Company’s Buflomedil related intangible assets is zero; therefore, no impairment of the Company’s intangible assets was necessary.

NOTE 3 - INVENTORY

Inventory consisted of the following:

	March 31,			December 31,
	2013			2012
Raw materials	$	28,380,903		$	30,198,816
Finished goods		6,659,052			7,930,684
		35,039,955			38,129,500
Obsolescence reserve		(1,779,729	)		(1,769,984	)
Total Inventory	$	33,260,226		$	36,359,516

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

	March 31,			December 31,
	2013			2012
Permit of land use	$	449,474		$	447,013
Building		2,432,442			2,419,125
Plant, machinery and equipment		6,418,768			6,381,209
Motor vehicle		147,890			147,080
Office equipment		223,947			222,273
Construction in progress		4,127,396			3,688,567
Total		13,799,917			13,305,267
Less: accumulated depreciation		(4,511,658	)		(4,273,373	)
Property and Equipment, net	$	9,288,259		$	9,031,894

Construction in progress consists of machinery and construction supplies that have been paid for, but are not yet completed and placed into production. Once the machinery is working or the facility is in use, it is moved into plant, machinery and equipment and depreciated. 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 - 35
Plant, machinery and equipment		10
Motor vehicle		5 - 10
Office equipment		3-5

For the three months ended March 31, 2013 and 2012, depreciation expense was $214,406 and $212,424, respectively.

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 - INTANGIBLE ASSETS

Intangible assets represent the cost of medical formulas approved for production by the CFDA in China. During the three months ended March 31, 2013 or 2012, the Company did not obtain CFDA production approval for any medical formula and therefore there were no costs reclassified from advances to medical formulas.

Approved medical formulas are amortized from the date CFDA approval is obtained over their individually identifiable estimated useful life, which are 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 $136,062 and $152,799 for the three months ended March 31, 2013 and 2012, respectively. 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 CFDA approval, when indications of impairment are present and at the date of each financial statement. The Company’s evaluation is based on an estimated undiscounted net cash flow model, considering 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 discounted estimated future net cash flows. As a result of the evaluation, the Company has determined that each medical formula continues to provide benefits to the Company and no impairment was recognized during the three months ended March 31, 2013 or 2012.

At March 31, 2013 and December 31, 2012, intangible assets consisted solely of CFDA approved medical formulas as follows:

	March 31,			December 31,
	2013			2012
Gross carrying amount	$	5,387,075		$	5,357,580
Accumulated amortization		(3,097,224	)		(2,944,726	)
Net carrying amount	$	2,289,851		$	2,412,854

NOTE 6 – ADVANCES FOR PURCHASES OF INTANGIBLE ASSETS

In order to expand the number of medicines manufactured and marketed by the Company, the Company has entered into contracts with independent laboratories for the purchase of medical formulas. Although CFDA approval has not been obtained for these medical formulas as of the dates of the contracts, the object of the contracts is for the purchase of CFDA-approved medical formulas once the CFDA approval process is completed. Some of the medical formulas currently in the CFDA approval process also come with patents. The Company has received the title for two patents. The related patents have not expired.

Prior to entering into the contracts, the laboratories typically have completed all required research and development to determine the medical formula for and the method of production of the generic medicine. Since the laboratories are not eligible to apply for CFDA production approval, they usually collaborate with a production facility (such as the Company) and apply for the production approval in the name of the manufacturer. The Company buys the final products with the production approval from the CFDA and the laboratories have to complete the CFDA approval process from the point of the contract.

A typical CFDA approval process for the production of a generic medical product involves a number of steps that generally requires three to five years. If the medical formula is purchased at the point when the generic medical product receives the CFDA’s approval for clinical study, which is very typical for the Company, the clinical study that follows will usually take from one and a half to three years to complete. After the clinical study is completed, the results are submitted to the CFDA and a production approval application is filed with the CFDA. In most cases, it will take between eight to eighteen months to prepare and submit the production approval application and obtain CFDA approval. Upon approving the generic medical product, the CFDA issues a production certificate and the Company can produce and sell the generic medical product. As a result of this process, CFDA approval is expected to be received in approximately two to five years from the dates of the medical formula contracts.

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Under the terms of the contracts, the laboratories are required to obtain production approval (on behalf of the Company) for the medical formulas from the CFDA. Management monitors the status of each medical formula on a regular basis in order to assess whether the laboratories are performing adequately under the contracts. If a medical product is not approved by the CFDA, 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 the application of those payments to another medical formula with the same laboratory. As a result of the refund right, the Company is purchasing an approved medical product. Accordingly, payments made prior to the issuance of production approval by the CFDA are recorded as advances for purchases of intangible assets.

To date, no formula has failed to receive CFDA production approval nor has the Company been informed or become 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 the refund from the laboratory or have the payments applied to another medical formula with the same laboratory.

At March 31, 2013, the Company was obligated to pay laboratories and others approximately $6,519,000 upon completion of the various phases of contracts to provide CFDA production approval of medical formulas.

NOTE 7 – RELATED PARTY TRANSACTIONS

Total advances owing to a board member were $1,354,567 and $1,354,567 as of March 31, 2013 and December 31, 2012, respectively, and are recorded as other payables – related parties on the accompanying condensed consolidated balance sheets. The advances bear interest at a rate of 1.0% per year. Total interest expense of $3,386 and $1,970 was recognized for the three months ended March 31, 2013 and 2012.

NOTE 8 – NOTES PAYABLE

On October 30, 2012, the Company entered into a new revolving line of credit with another bank in the amount of RMB 30,000,000. The related note payable bears interest at an annual rate of 6.90% (based upon 115% of the PRC government’s current short term rate of 6.00%). Advances on the line of credit are due one year from the date of the advance and are collateralized by certain land use rights, buildings and accounts receivable. The outstanding balance due under the revolving line of credit was RMB 30,000,000 ($4,787,285) as of March 31, 2013. The Company has no additional amounts available to it under the line of credit. This amount has been classified as short-term notes payable in the accompanying consolidated balance sheet at December 31, 2012.

Fair Value of Notes Payable – Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the carrying amounts of notes payable outstanding as of March 31, 2013 and December 31, 2012 approximated their fair value because of either the immediate or short-term maturity of these financial instruments or because the underlying instruments bear interest rates that approximated current market rates.

NOTE 9 - 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 on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income in the period that includes the enactment date.

Undistributed earnings of Helpson, the Company’s foreign subsidiary, since its acquisition, amounted to approximately $110.5 million at March 31, 2013. Those earnings, as well as the investment in Helpson of approximately $23.3 million, are considered to be indefinitely reinvested and, accordingly, no U.S. federal or state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. federal and state income taxes (net of an adjustment for foreign tax credits) and withholding taxes payable to the PRC. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits may be available to reduce a portion of the U.S. tax liability.

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Under current tax law in the PRC, the Company is and will be subject to the following enterprise income tax rates:

		Enterprise Income
Year		Tax Rate
2013		15%
2014 and after		25%

The provision for income taxes consisted of the following:

	Three months ended March 31,
	2013			2012
Current	$	-		$	564,893
Deferred		(269,011	)		(34,312	)
Total income tax (benefit) expense	$	(269,011	)	$	530,581

The Company has available to it net operating losses for PRC tax purposes of $482,668. The Company also provided a valuation allowance in this same amount against the operating losses during the current quarter related to the net operating loss carryforward since they did not meet the more likely than not criteria for recognition of the loss carryforward in the current period.

The Company has 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 10 – 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. 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. The banker’s acceptance notes are recorded at cost which approximates fair value. The Company held the following assets recorded at fair value as of March 31, 2013 and December 31, 2012:

CHINA PHARMA HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

			Fair Value Measurements at
			Reporting Date Using
Description	March 31, 2013		Level 1		Level 2		Level 3
Banker's acceptance notes	$	1,180,864	$	-	$	1,180,864	$	-
Total	$	1,180,864	$	-	$	1,180,864	$	-


			Fair Value Measurements at
			Reporting Date Using
Description	December 31, 2012		Level 1		Level 2		Level 3
Banker's acceptance notes	$	101,570	$	-	$	101,570	$	-
Total	$	101,570	$	-	$	101,570	$	-

NOTE 11 - STOCKHOLDERS' EQUITY

Preferred and Common Stock

The total number of authorized shares is 95,000,000 shares of common stock and 5,000,000 shares of preferred stock. 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 of directors.

Warrants

As of March 31, 2013, the Company had warrants outstanding and exercisable to purchase an aggregate of 150,000 shares of the Company's common stock at exercise prices ranging from $3.00 to $3.80 per share, which expire May 16, 2013. At March 31, 2013, the warrants had a weighted-average exercise price of $3.40 per share, a weighted-average remaining contractual life of 0.2 years and a total intrinsic value of $0.

Stock and Stock Options

2010 Incentive Plan

On November 12, 2010, the Company’s Board of Directors adopted, and on December 22, 2010 its stockholders approved, the 2010 Long-Term Incentive Plan (the “2010 Incentive Plan”), which 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 2010 Incentive Plan currently allows for equity awards of up to 4,000,000 shares of common stock. Through March 31, 2013, 75,000 shares of common stock and options to purchase an aggregate of 25,000 shares of stock options had been granted under the 2010 Incentive Plan.

There were no securities issued from the 2010 Incentive Plan during the three months ended March 31, 2013.

At March 31, 2013, there was no remaining unrecognized compensation expense related to stock options or restrictive stock grants.

NOTE 12 – CONTINGENCIES

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.

NOTE 13 – CONCENTRATIONS

At March 31, 2013, one customer accounted for 10.5% of accounts receivable. At December 31, 2012, no customer accounted for more than 10.0% of accounts receivable.

For the three months ended March 31, 2013, no customer accounted for more than 10% of sales. For the three months ended March 31, 2012, one customer accounted for 10.3% of sales.

For the three months ended March 31, 2013, purchases from one supplier accounted for 34.0% of raw material purchases. For the three months ended March 31, 2012, purchases from one supplier accounted for 14.1% of raw material purchases.

ITEM 2. 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 reader of the forward-looking statements that any such statements that are 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 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 are 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

China Pharma Holdings, Inc. is a specialty pharmaceutical company that develops, manufactures, and markets pharmaceutical products for human use for a wide range of high incidence and high mortality conditions in China, including cardiovascular, central nervous system (“CNS”), infectious and digestive diseases. The Company has a broad and expanding distribution network across 30 provinces, municipalities and autonomous regions. The Company is currently organized under the laws of the State of Nevada in the United States. Hainan Helpson Medical & Biotechnology Co., Ltd. (Helpson), located in Haikou City, Hainan Province, China, is a wholly-owned subsidiary of China Pharma Holdings, Inc.

The economic and pharmaceutical challenges and uncertainties had negatively impacted our business in 2012, which led to the overall decline in sales of our products. Additionally, in March 2013, the China Food and Drug Administration (“CFDA”) issued a nationwide notice (the “CFDA Notice”) for the cessation of the production, sale and use of Buflomedil effective immediately. The CFDA Notice was a result of the reevaluation done by the CFDA based on the indications from the recent China and international research materials, which found the side effect risks of Buflomedil to nerve system and cardiovascular system have surpassed its clinical treatment effect. It was applicable to all the manufacturers and distributors in China who are in the business of the production and sale of Buflomedil-related products. Pursuant to the CFDA Notice, the Company ceased the production and sale of Buflomedil-based products and recalled its Buflomedil-based products from the market.

During our course of 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 CFDA. If the CFDA issues any updates to cease the production, sale and use of any of our products, we should comply with. As a result, we may incur significant costs in complying with cessation requirements, and our financial results could be materially 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.

Recalls could also harm our reputation, increase our costs or 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. The CFDA has the authority to revoke drug approvals previously granted and remove from the market previously approved products for various reasons. We may be subject from time to time to product recalls initiated by us or by the CFDA. Delays in obtaining regulatory approvals, the revocation of prior approvals, or product recalls could impose significant costs on us and adversely affect our ability to generate revenue.

The CFDA promulgated Good Manufacturing Practices for Pharmaceutical Products (2010 revised version) (the “new GMP”) on February 12, 2011, which became effective on March 1, 2011. The new GMP standards outline the basic principles and standards for the manufacturing of pharmaceutical products and the management of quality controls in the manufacturing process in the PRC. Pursuant to those mandatory requirements, the upgrading of our two injectable product lines must be accomplished by the end of 2013. We have completed the planning, design and an environment contamination evaluation, and worked in full swing of the construction relative to certain required facilities and equipment. We continue to evaluate and implement the additional requirements of the standards.

The products in our pipe-line progressed slowly but steadily along the development process, and are getting closer to product launch. The CFDA is also revising its production approval criteria and processes, resulting in longer approval time for new production applications across all types of products. In some cases they are adding additional requirements for products already under review.

The following is a list of the current status of some of our pipeline products:

Ÿ	Cadesartan. We received production approval from the CFDA for Candesartan, a front-line drug therapy we developed for the treatment of hypertension in November 2012. We plan to launch this product during 2013.

Ÿ	Antibiotic Combination. We completed the Phase I clinical trials of our novel cephalosporin-based combination antibiotic in the third quarter of 2010. We are currently in Phase II of the clinical trial which is progressing well.

Ÿ	Rosuvastatin. Rosuvastatin is a generic form of Crestor, a drug for indication of high blood cholesterol level. Clinical trials for this generic drug were completed in the fourth quarter of 2010 and we have submitted an application for production approval.

Heart Disease Drug. We are developing a liquid oral medicine for the treatment of coronary heart disease. This product comes with a patented Traditional Chinese Medicine (TCM) formula and we are currently conducting Phase III clinical trials for this drug. Due to the improved regulatory requests for clinical works, we adjusted our anticipated completion time frame for the clinical trials work for this product to 2013.

Market Trends

The Chinese pharmaceutical industry has been a key contributor to the PRC’s economic growth. According to the research report China Pharma Sector issued by CITI on January 13, 2013, they estimated that the Chinese prescription market reached a size of approximately RMB548billion (approximately 88 billion USD) in 2012 and forecast that the pharma market could grow approximately 17% in 2013. We believe the growth of Chinese pharmaceutical industry. According to the CFDA information center, the Chinese pharmaceutical market size has grown from RMB157.2 billion in 2000 to RMB619.4 billion in 2009. Furthermore, according to a report from IMS Health, a leading consulting firm focusing on healthcare and pharmaceutical areas, Asian, Australian and Chinese Pharmaceutical Market 2010-2014 Forecast released on September 2010, the pharmaceutical market in China was expected to grow by a CAGR of 23.2%, and to reach US$90 billion in 2014. According to the report, this projected growth is supported by the strong growth in the Chinese economy, the aging population, increasing rate of chronic disease in the PRC, the recent health care reform, and improvements in intellectual property right protection in the PRC.

The Healthcare Reform program announced by the Chinese government in late 2009 is having a significant impact on all healthcare related industries in China, including the pharmaceutical industry. Over all, the government plans to provide a basic, universal healthcare system to all citizens of China. We believe volume expansion will continue as government subsidies to rural communities expand further. While pricing is generally set at the central government level, provincial government intervention has added complexity to the pricing-volume interaction. In addition to EDL products, we have also seen pricing pressure on most of the drugs we sell. While these changes have more impact on pharmaceutical distribution companies, manufacturers of pharmaceutical products are also affected. We believe the general implication is that gross margins for pharmaceutical products will continue to be under pressure for some time. That being said, a pharmaceutical manufacturer with experienced management and the ability to react quickly to changes will not only survive but thrive in this environment.

Results of Operations for the Fiscal Year Ended March 31, 2013

Revenue

For the three months ended March 31, 2013, our sales revenue was $8.2 million, a decrease of 49%, compared to $16.1 million in the previous year period.

Set forth below are our revenues by product category in millions USD for the three months ended March 31, 2013 and 2012.

Product Category	Three Months Ended March 31		Net Change	% Change
Product Category	2013	2012	Net Change	% Change
CNS Cerebral & Cardio Vascular	$2.1	$4.8	($2.7)	-56%
Anti-Viro/ Infection & Respiratory	$4.6	$6.8	($2.2)	-32%
Digestive Diseases	$0.8	$2.5	($1.7)	-67%
Other	$0.7	$2.0	($1.3)	-66%

Given the capital expenditure pressure from 2013 new GMP upgrade project, we have to control credit expansion in the market, this tightening marketing strategy has negatively impacted our revenue. Sales decreased throughout our major product categories. The most significant revenue decrease in terms of dollar amount was in our “CNS Cerebral & Cardio Vascular” product category, which generated $2.1 million in sales revenue in the three months ended March 31, 2013 compared to $4.8 million a year ago, a decrease of $2.7 million. This decrease was mainly due to sales of Bufomedil, because the CFDA issued a nationwide notice for the cessation of the production, sale and use of Buflomedil effective immediately. The Company ceased the production and sale of this product and voluntarily recalled limited quantities of our sold products from the market as a customer service measure. No further recall is mandated by the CFDA notice. Sales of the “Anti-Viro/Infection & Respiratory” category decreased by $2.2 million to $4.6 million in the three months ended March 31, 2013 compared to $6.8 million in the previous year period. Our “Digestive Diseases” category generated $0.8 million of sales in the three months ended March 31, 2013, compared to $2.5 million in the previous year period, or a decrease of $1.7 million. Our “Other” product category sales fell to $0.7 million from $2.0 million, a decrease of $1.3 million.

In the three months ended March 31, 2013, revenue breakdown by product category showed some changes mainly due to the CFDA notice. Sales of the “CNS, Cerebral & Cardio Vascular” category represented 14% and 24% of total sales in the three months ended March 31, 2013 and 2012 respectively. Sales of the “Anti-Viro & Respiratory” products category represented 32% and 34% of total sales in the three months ended March 31, 2013 and 2012. The “Digestive Diseases” category represented 4% and 11% of total revenue in the three months ended March 31, 2013 and 2012 respectively. The “Other” category represented 6% and 11% of total revenue in the three months ended March 31, 2013 and 2012 respectively.

Cost of Revenue

For the three months ended March 31, 2013, our cost of revenue was $6.1 million, or 74.3% of total revenue, which represented a decrease of $4.7 million from $10.8 million, or 67% of total revenue, in the three months ended March 31, 2012, a decrease of 43.2%. The decrease in cost of revenue during the first quarter of 2013 was not proportional to the revenue decrease, primarily due to increases in our average unit costs for inventory and the continuously rising cost of our raw materials and other fixed cost.

Inventory Obsolescence

In March 2013, as a result of the CFDA Notice, the Company recognized an inventory obsolescence expense in the amount of $3,692,895 to write off all of our Buflomedil-related raw materials and finished goods inventory. This was recorded as inventory obsolescence on the accompanying statement of operations for the three months ended March 31, 2013, which represented 11.1% of total inventory as of March 31, 2013. There was no comparable expense for the three months ended March 31, 2012.

Gross Profit and Gross Margin

Gross loss for the three months ended March 31, 2013 was $1.6 million, while gross profit for the three months ended March 31, 2012 was $5.3 million. Our gross profit margin in the first quarter of 2013 was (19%), compared to 33% in the first quarter of 2012. Without the effect of inventory obsolescence in the first quarter of 2013, management estimates that our gross profit would have been approximately $2.1 million, and gross margin would have been 26%in the first quarter of 2013. The Healthcare Reform instituted by the Chinese government since 2009 has resulted in margin compression in most pharmaceutical products on the markets today, especially in the generic space that many of our products are in. The decrease of sales and continued increases of the purchase price of raw materials attributed to the decrease of gross profit. Going forward, we expect to see continued pricing pressure on most products, but new products such as Candesartan and Rosuvastatin could help to support overall gross margin once they are launched.

Selling Expenses

Our selling expenses for the three months ended March 31, 2013 were $0.81 million, a decrease of approximately $0.08 million, compared to $0.89 million in the same period last year. Selling expenses accounted for 9.8% of the total revenue in the three months ended March 31, 2013 compared to 5.6% in the three months ended March 31, 2012. Due to many adjustments in our selling processes from healthcare reform policies, despite the decrease in sales, we still needed to maintain necessary personnel and expenses to support the sales and collection of accounts receivable.

General and Administrative Expenses

Our general and administrative expenses for the three months ended March 31, 2013 were $0.74 million, an increase of $0.06 million from $0.68 million for the same period of 2012. General and administrative expenses accounted for 7.5% and 4.2% of our total revenues for the three months ended March 31, 2013 and 2012, respectively.

Bad Debt Expense (Benefit)

In general, our normal credit or payment terms extended to customers are 90 days. This has not changed in recent years. Due to the peculiarity of the Chinese pharmaceutical market environment, deferred payments to pharmaceutical companies by state-owned hospitals and local medicine distributors are a normal phenomenon. Our customers are primarily pharmaceutical distributors who sell to mostly government-backed hospitals. Therefore the age of our receivables from our customers tends to be long. Although these customers typically pay after the due date of the receivables, since the majority of hospitals in China are backed by the government, management believes that the deferred payments from state-owned hospitals are secure and will eventually be collected. So far, we have always been able to collect our receivables and have not written-off any receivables in our 19-year history of doing business with hospitals.

The amount of accounts receivable that were past due (or the amount of accounts receivable that were more than 90 days old) was $52.8 million and $62.1 million as of March 31, 2013 and December 31, 2012, respectively. The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of March 31, 2013 and December 31, 2012:

	March 31,			December 31,
	2013			2012
1 - 90 Days		15.8	%		12.1	%
90 - 180 Days		11.0	%		12.8	%
180 - 360 Days		27.6	%		32.4	%
360 - 720 Days		45.6	%		42.7	%
Total		100	%		100	%

Although we have not had to write off any receivables thus far in our history, we do set aside an allowance for doubtful accounts. Our bad debt allowance estimate is currently the sum of 3.5% of accounts receivable that are less than 365 days old, 10% of accounts receivable that are between 365 days and 720 days old and 100% of accounts receivable that are greater than 720 days old (although there were no accounts receivable over 720 days old at March 31, 2013 or December 31, 2012).

To the extent that our current allowance for doubtful accounts is lower than that of the previous period, we recognize a bad debt benefit for the difference during the current period, and when the current allowance is higher than that of the previous period, we recognize a bad debt expense for the difference. The allowance for doubtful accounts was $4.33 million and $4.43 million as of March 31, 2013 and December 31, 2012, respectively. The decrease in the allowance was mainly due to the decrease in our accounts receivable balance during the quarter ended March 31, 2013. The changes in the allowance for doubtful accounts during the three months ended March 31, 2013 and 2012 were as follows (there were no write-offs or recoveries):

	For the Three Months Ended
	March 31,
	2013				2012
Balance, Beginning of Period		$	4,429,945			$	3,536,405
Bad debt expense (benefit)			(119,930	)			320,098
Foreign currency translation adjustment			23,396				19,966
Balance, End of Period		$	4,333,411			$	3,876,469

Impairment of intangible 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. No impairment losses were recognized during the three month ended March 31, 2013 or 2012.

Income (Loss) from Operations

Our operating loss for the three months ended March 31, 2013 was $3.0 million, compared to operating income of $3.4 million in the three months ended March 31, 2012, a decrease of $6.4million. The main reasons for the decrease were lower revenue, and the inventory obsolescence reserve recognized as a result of the CFDA notice on Buflomedil in the first quarter of 2013.

Net Interest Expense

Net interest expense for the three months ended March 31, 2013 and 2012 was $80,859 and $76,847 respectively.

Income Tax Benefit (Expense)

In the three months ended March 31, 2013 and 2012, we paid income tax at the rate of 15%. Income tax benefit was $0.27 million in the three months ended March 31, 2013; and income tax expense was $0.53 million for the three months ended March 31, 2012. As a result of the CFDA notice ceasing production of Buflomedil, we have net operating loss carry forwards of $0.48 million which, under Chinese tax law can be “carried forward” for 5 years. We believe that we will have sufficient taxable income in the near future to utilize this tax benefit. We obtained the "National High-Tech Enterprise" status ("National HT Status") from the PRC government in the fourth quarter of 2010. With this designation, we are entitled to a preferential tax rate of 15% for the years ending December 31, 2011, 2012 and 2013, which is notably lower than the statutory income tax rate of 25%.

Net Income (Loss)

Net loss for three months ended March 31, 2013 was $2.8 million, a decrease of $5.6 million, from the net income of $2.8 million in the three months ended March 31, 2012.The decrease in net income was mainly due to the decrease in revenue, and the inventory obsolescence reserve recognized as a result of the CFDA notice on Buflomedil.

For the three months ended March 31, 2013, earnings per basic and diluted common share was minus $0.06 per share, compared to $0.06 per share in the previous year period.

The number of basic and diluted weighted average outstanding shares used to calculate earnings per share were 43,579,557 for the three months ended March 31, 2013 and 43,529,557 for the three months ended March 31, 2012.

Liquidity and Capital Resources

Our principal sources of liquidity are cash generated from operations and short-term bank loans. Our cash and cash equivalents was $4.75 million, which represents 3.0% of our total assets as of March 31, 2013, was comparable to $4.03 million, which represents 2.5% of our total assets as of December 31, 2012. At March31, 2013, a total of $5.93 million is considered to be reinvested indefinitely in Helpson and is not expected to be available for payment of dividends, for other payments to our parent company or to its shareholders. As of March 31, 2013, we had a principal balance of $4.79 million in short-term bank loans. The cash flow generated from operating activities funded our construction of new GMP upgrading project.

During the first quarter in 2013, we continued our vigorous collection efforts from our customers and achieved good results. While we have made progress, improving our accounts receivable collection continues to be a focus of our management team and we expect to make further progress in the quarters to come.

At March 31, 2013, the Company was obligated to pay laboratories $6.52million upon their completion of the various phases of contracts to provide CFDA production approval of more than 10 medical formulas. Those payments are expected to be made out of the Company’s cash flow from operations ratably over approximately the following 48 months, depending on the progress of the various contracts. A typical contract requires an upfront deposit and then two to three additional milestone payments plus a final payment when the CFDA approval is obtained. Since the payments are progress driven, it is difficult to calculate the timing of the payments with any precision; however, management expects that the payments will be somewhat even over the payment period given the number of contracts in progress. The funding obligation is not expected to have an undue negative impact on the liquidity of the Company given the Company’s historical cash flows and estimated future cash flows from operating activities.

Based on our current operating plan, management believes that our cash provided by operations as well as the anticipated capital expenditure project financing from a bank will be sufficient to meet our working capital needs and our anticipated capital expenditures, including expenditures for new formula acquisitions and new GMP upgrading related construction and equipment, for the next twelve months. However, if events or circumstances occur and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing as necessary for expansion purposes and when we believe market conditions are most advantageous, which may include debt and/or equity financing. There can be no assurance that any additional financing will be available on acceptable terms, if at all.

Operating Activities

Net cash provided by operating activities was $1.11 million in the three months period ended March 31, 2013compared to $0.40 million for the same period in 2012. As a common business practice in China, Banker's Acceptances (BAs) are often used to settle payment instead of checks. During the three months ended March 31, 2013, the Company collected accounts receivable with BAs with a maturity of more than 90 days, and such BAs are not treated as cash and cash equivalent under U.S. GAAP. If cash equivalent treatment were to be applied to BAs with more than 90 days maturity, $2.18million would have been generated in operating activities in the three months ended March 31, 2013. This was mainly because of the improved performance in collection of accounts receivable partially offset the decrease in net income in the first quarter 2013.

At March31, 2013, our accounts receivable was $62.7million, a decrease of $3.5 million from $66.2million at December 31, 2012. Our receivables decreased due to decreased sales and the improved performance of our collection in account receivables. For the three months ended March 31, 2013, $1.9million was generated from decreases in Accounts Receivable, compared to $4.1million was used to fund increases in Accounts Receivable in the comparable period a year ago.

At March31, 2013, total inventory was $33.3 million, a decrease of $3.1 million from $36.4 million at December 31, 2012. This decrease was mainly due to the inventory obsolescence recognized pursuant to the CFDA notice on Buflomedil in March 2013.

For the period ending March 31, 2013, the decrease in our accounts payable was responsible for a cash usage of $0.1 million, compared to a cash usage of $2.7 million in the same period in 2012.

Investing Activities

In the three months ended March 31, 2013, net cash used in investing activities was $0.4 million, a decrease of $0.68 million, compared to $1.08 million in three months ended March 31, 2012.The investment spending in the first quarter of 2013 was mainly for the new GMP upgrading related construction and equipment.

Financing Activities

There was no cash flow generated from financing activities in the three months ended March 31, 2013 or 2012.

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 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. As of December 31, 2012 and 2011, the net assets of Helpson were $142,597,000 and $135,748,004, respectively. Due to the restriction on dividend distribution to overseas shareholders, the amount of Helpson’s net assets that were designated for general and statutory capital reserves, and thus could not be transferred to our parent company as cash dividends, were $7,935,122and $7,863,490 (50% of registered capital) for the fiscal years ended December 31, 2012 and 2011. Since the amount that Helpson must set aside for the statutory surplus fund only accounts for 5.6% and 5.8%, 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 three months ended March 31, 2013.

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. 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 submitting a payment application form together with applicable invoices and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of Helpson, our PRC subsidiary, to transfer its net assets to our parent company through loans, advances or cash dividends.

Off Balance Sheet Arrangements

As of March 31, 2013, we did not have any off-balance sheet arrangements.

Commitments

At March31, 2013, we were obligated to pay laboratories and others approximately $6.52 million over approximately the next four years upon completion of the various phases of contracts to provide CFDA production approval of medical formulas.

We entered into purchase and construction agreements during fiscal year 2012 in connection with the construction of a new facility and required manufacturing improvements. Future minimum commitments under the agreements are as follows:

For the Years Ending December 31:
2013	$	13,133,498
2014		968,860
Total	$	14,102,358

Critical Accounting Policies

Management's discussion and analysis of its 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 3. Quantitative and Qualitative Disclosures about Market Risk

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and interim Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to management, including our Chief Executive Officer and interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, our Chief Executive Officer and interim Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

During the period covered by this report, in order to remediate our material weakness in internal control over financial reporting with respect to our reporting for inventory obsolescence and impairment of long-lived assets as identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, we have retained accounting consultants to assist us with the reporting of such transactions, and we have made this resource available to us on an on-going basis should the need their assistance in the future. There were no other 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.

PART II OTHER INFORMATION

Item 6. Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINA PHARMA HOLDINGS, INC.


Date: May 14, 2013	By: /s/ Zhilin Li
	Name: Zhilin Li
	Title: President and Chief Executive Officer
	(principal executive officer)


Date: May 14, 2013	By: /s/ Zhilin Li
	Name: Zhilin Li
	Title: Interim Chief Financial Officer
	(principal financial officer and principal
	accounting officer)

EXHIBIT INDEX

No. Description

31.1 – Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 – Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 – Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS* – XBRL Instance Document

101.SCH* – XBRL Taxonomy Extension Schema Document

101.CAL* – XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF* – XBRL Taxonomy Extension Definition Linkbase Document

101.LAB* – XBRL Taxonomy Extension Label Linkbase Document

101.PRE* – XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.

Attached files

CHINA PHARMA HOLDINGS, INC. Reports

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