China Health Labs & Diagnostics Ltd. announces financial results for the third quarter ended September 30, 2013 and conference call to discuss the third quarter end results

TSX-V: CHO

TORONTO, Dec. 2, 2013 /CNW/ - China Health Labs & Diagnostics Ltd. ("China Health" or the "Company") (TSXV: CHO), is pleased to announce the financial results for the three months ended September 30, 2013.

Highlights for the three and nine months ended September 30, 2013 include:

• Revenue decreased to $6.641 million for the three months ended September 30, 2013 compared to $9.623 million for the three months ended September 30, 2012 and profit decreased by 267% to a loss of $1.390 million.
• Revenue decreased to $18.288 million for the nine months ended September 30, 2013 compared to $25.867 million for the nine months ended September 30, 2012 and profit decreased by 203% to a loss of $3.939 million.
• Gross margins as a percentage of revenue decreased to 52% for the three months ended September 30, 2013 from 59% for the three months ended September 30, 2012.
• Gross margins as a percentage of revenue decreased to 50% for the nine months ended September 30, 2013 from 54% for the nine months ended September 30, 2012.
• Earnings per share decreased to a loss of $0.06 per basic and diluted share for the nine months ended September 30, 2013 compared to earnings per share of $0.06 for the nine months ended September 30, 2012.
• Increased installed base of BK Clinlabs to 1,002 rural hospitals by installing an additional 74 BK Clinlabs during the nine months ended September 30, 2013.  The Company concluded agreements to install an additional 12 BK Clinlabs to increase the total to 1,014 locations in fourteen provinces/ regions to date, compared to 817 locations in four provinces/ regions at the beginning of 2012.

Sales seasonality in China for almost all industries is impacted by Chinese New Year, which is the major national holiday in China, and depending on the Chinese lunar calendar, will generally start in the last week of January or first two weeks of February. During Chinese New Year, a large percentage of factories are shut down and most sales and service activities are put on hold. Further, the Chinese central government generally completes and releases their annual budgets after Chinese New Year in March of each year. During the first quarter of the year, most of the Company's revenue from the Chinese central government typically is from large sales orders from the previous year that are being completed, or from smaller sales orders to fill urgent needs.  Most of the Company's larger sales orders are confirmed after the annual Chinese government budgets are set and released after March of each year.

As a result of the above factors, the Company's first quarter revenue is generally the lowest as a percentage of annual revenue, and the third and fourth quarters, when the Company is working to deliver sales orders confirmed after the budgeting process, tend to comprise the largest percentage of revenue. For an example, revenue for the quarter ended March 31, 2012 accounted for approximately 17% of total revenue and 11% of profit, or $45.781 million and $6.829 million respectively, while the fourth quarter accounted for approximately 43% of total revenue and 44% of profit for the year ended December 31, 2012.  During the fiscal year 2012, the 18th National Congress of the Communist Party of China ("18^th National Congress") was held during November 2012, and during the first quarter of fiscal year 2013, the 12^th NPC Standing Committee and the 12^th Chinese People's Political Consultative Conference were held,  resulting in a change in leadership at all levels. As the Company's total lab solution products are primarily sold to the PRC government and related entities, the change in leadership has had an effect on the Company's business. In November 2013, the Third Plenary Session of the 18^th Central Committee was held in Beijing. This was the first meeting under the new leadership to discuss the foundation of the reform and future development in China. Many government administrative processes and decisions were delayed as a consequence of the change in leadership and reform resulting in the slowdown in sales for the Company. As many of the decisions made during the Third Plenary Session will positively affect the healthcare industry in China, the Company expects sale orders and projects to resume or improve during the last quarter of 2013 or next year. For further information on seasonality, please see the Company's financial statements and MD&A filed on SEDAR.

"The Company has continued to expand its business to new provinces and regions in China in the rural hospitals and clinics sector," said Wilson Yao, CEO of China Health. "We are pleased to have entered into contracts with Hunan Province to install 3 BK Clinlabs in local health centres. The Company expects to expand in these areas once the local customers recognize the overall benefits of the BK Clinlabs to operational revenue of the health centres on the expectation that the BK Clinlabs will improve traffic and health procedures. We also plan to deliver our food safety testing BK-iQM systems to the Beijing municipal government in the fourth quarter, which has a total sales value of approximately $5.3 million."

Revenue for the three and nine months ended September 30, 2013 decreased by 31% to $6.641 million and by 29% to $18.288 million, respectively, compared to the same periods last year. The decrease in revenue is largely due to decreased sales in the rural hospital and clinics and POCT solutions and products business sector. During the first nine months in 2012, the Company had 80 BK Clinlabs and 63 Rural Mobile Labs installed and only 74 BK Clinlabs installed during the nine months ended September 30, 2013. Revenue from POCT solutions and products and food safety labs are generally from large sales orders that are not placed evenly throughout the year.

Gross margin for the three and nine months ended September 30, 2013 decreased by 39% to $3.430 million and by 35% to $9.080 million, respectively, as compared to the same periods last year. Gross margins decreased due to slower sales during the three and nine months ended September 30, 2013. Gross margin as a percentage of revenue for the three and nine months ended September 30, 2013 was 52% and 50%, respectively, compared to 59% and 54% for the same periods last year.  Gross margin as a percentage of revenue decreased due to the change in sales mix, with 78% of total revenues from urban hospitals and labs sector during the nine months ended September 30, 2013, as compared to 62% of total revenues for the nine months ended September 30, 2012. The gross margin as a percentage of revenue is lower in the urban hospitals and labs sector, as compared to our total lab solution businesses.

Administrative expenses for the three and nine months ended September 30, 2013 increased by 6% to $2.720 million and by 26% to $7.962 million, respectively, as compared to the same periods last year. The principal reason for the increase was higher overhead costs including new employees and expanded facilities to support a growing customer base and sales. While administrative expenses have increased significantly as compared to the prior comparative period, the Company believes the expenses are necessary in order to gain a competitive advantage by growing its operations and customer base and by expanding to new provinces and regions, which involves hiring and training new employees, setting up operations in new areas where the Company will have its total lab solutions installed and/or delivered, and incurring general costs to support the Company's expansion.

Share-based compensation for the three and nine months ended September 30, 2013 was $13,000 and $60,000 respectively, compared to $37,000 and $164,000 respectively for the same periods last year. The share-based compensation expense is a result of stock options that vested during the period for stock options granted to employees in April 2011 and to an officer in September 2011. The fair value of options granted on April 14, 2011 was estimated on date of grant at $0.069 million and of options granted on September 1, 2011 was estimated on date of grant at $48,000 using the Black-Scholes option-pricing model. The fair values of options are expensed over the vesting period ending on April 14, 2014 and September 1, 2014, respectively.  There were no stock options granted during the three and nine months ended September 30, 2013.

Research and development ("R&D") expenditure for the three and nine months ended September 30, 2013 increased by 21% to $0.707 million and by 103% to $2.389 million, respectively, compared to the same periods last year. Research and development expenses are higher as the Company invests its resources in developing new products and also in improving current products to meet an ever evolving healthcare market in China. Research and development expense are expected to continue to increase as the Company seeks to incorporate new technology into its POCT solutions, which will take several years to develop and go to market.  Research and development is focused on developing new diagnostics products and solutions based on market conditions and demand, including a full range of POCT solutions and improving the LMS system. The Company is accelerating product development to maintain its competitive advantages in the areas where it has developed unique proprietary solutions. Since the Company often collaborates with its customers to develop solutions, it is able to keep costs under control while developing products tailored to customer needs. The margins on new products launched are generally higher than the existing products.

Selling expenses for the three and nine months ended September 30, 2013 increased by 31% to $1.083 million and by 26% to $3.010 million, respectively, as compared to the same periods last year. Selling expenses is higher due to expanding the rural lab solution business to additional Chinese provinces and the food safety business to additional Chinese cities. Selling and marketing expenditures include salaries and benefits, travel, promotion and marketing and advertising costs.

Current income tax expense for the three and nine months ended September 30, 2013 was $0.213 million and $0.576 million, respectively, as compared to the same periods last year, being a recovery of $0.235 million and an income tax expense of $0.617 million, respectively. The decrease in income taxes is due to an overall decrease in taxable income during the nine months ended September 30, 2013. The Company's PRC subsidiaries are subject to income taxes at a statutory tax rate of 25% in China except one subsidiary that is subject to PRC income taxes at 1% of gross sales. Prior to the fiscal year 2013, another PRC subsidiary qualified for income tax exemption during the first two years of profitable operations followed by a 50% tax reduction in the next three years for engaging in R&D activities in a particular economic zone.  The subsidiary received income tax exemptions in the years 2008 and 2009 with the years 2010 to 2012 being taxed at the 50% reduced tax rate.

Operating profit for the three and nine months ended September 30, 2013 decreased by 159% to a loss of $1.390 million and by 203% to a loss of $3.939 million, respectively, as compared to the same periods last year. Operating profit for the three and nine months ended September 30, 2013 decreased by 153% to a loss of $1.080 million and by 186% to a loss of $3.869 million, respectively, as compared to the same periods last year. Profit includes operating profit, interest expense, interest income and foreign exchange gain/loss. The decrease in operating profit and profit for the quarter ended September 30, 2013 is due to lower revenue and higher expenses spent in the period to expand the businesses and R&D.

Basic and fully diluted EPS was a loss of $0.02 for the three months ended September 30, 2013, compared to earnings per share of $0.04 for the three months ended September 30, 2012. Basic and fully diluted EPS was a loss of $0.06 for the nine months ended September 30, 2013, compared to earnings per share of $0.06 for the nine months ended September 30, 2012. EPS was lower for the fiscal period 2013 as compared to the fiscal period 2012 due to lower profit.

Cash totaled $3.060 million as at September 30, 2013, compared with $10.817 million as of December 31, 2012.  The Company's working capital as of September 30, 2013 was $26.432 million, compared with a $29.608 million working capital as of December 31, 2012.  Working capital decreased by $3.176 million due to the decrease in total current assets of $2.839 million and the increase in total current liabilities of $0.337 million. For the nine months ended September 30, 2013, net cash used in operating activities was $6.216 million compared to $5.052 million for the same period last year. The increase in cash used in operating activities for the nine months ended September 30, 2013 is mostly due to changes in non-cash working capital balances, together with a decrease in profit. For the nine months ended September 30, 2013, cash used in investing activities was $0.400 million, compared to cash from investing activities of $0.024 million for the same period last year. The change mainly relates to the purchases of property and equipment of $0.524 million and purchases of intangible assets of $0.035 million. Cash used in financing activities was $1.461 million for the nine months ended September 30, 2013, compared to cash provided from financing activities of $3.306 million for the same period last year. The increase in cash used is due to the repayment of $1.695 million in loan during the current nine month period compared to loans received of $2.732 million for the same period last year.

The Company is well positioned to expand its business for rural total lab solutions, POCT lab solutions and food safety lab solutions.  However, the Company may need to access additional debt or equity funding if it seeks to accelerate its growth, if it enters into an agreement for a large number of total lab solutions or if it pursues suitable acquisition opportunities. 

Outlook & Growth Strategy

The Company believes that it can resume its growth in revenues and profits and build on the leading position it has established in China providing total lab solutions for rural hospitals and clinics, POCT solutions for military and emergency services, and food safety lab solutions, based on the size and growth of the Chinese market for medical diagnostics and food safety, the government support for the market and the Company's proprietary products and services and customer relationships.

For the fourth quarter of 2013, the Company expects sales to be stronger than the other three quarters due to the signing and execution of the food safety contract. The overall performance for fiscal 2013 is expected to be weaker than the previous year.

For the next 12-month period, China Health intends to expand its business by focusing its efforts on expanding its sales network to additional Chinese provinces and cities in the areas where it has proprietary products and limited competition. Going forward, China Health expects revenue growth from its total lab solutions business lines to continue to be stronger than growth from its traditional business with large urban hospitals, and to comprise a higher percentage of revenues.

China Health will be hosting an investor conference call on Monday, December 2^nd, 2013 at 10:00 am (Eastern Time).

The purpose of this conference call will be to provide investors with an update on quarter ended September 30, 2013 results of the Company. Representatives of China Health on the conference call will be:

Mr. Chao Zhang, Chief Financial Officer
Mr. Kim Oishi, Member of the Board of Directors

Following the update, a question and answer session will be held.  To participate, the dial-in instructions are as follows:

DATE:	Monday, December 2^nd, 2013
TIME:	10:00am, Eastern Time

Participant Dial-In Number(s):

North America Toll-Free Dial-In Number:	1 [phone]
For Toronto and International Callers:	1 [phone]

A Taped Replay will be available from 1:00 pm Eastern Time on December 2^nd, 2013, to 11:59 pm Eastern Time on December 9^th, 2013.

Taped Replay Toll Free Number: 1.855.859.2056

Taped Replay Local Dial-in Numbers:

[phone]	[phone]	[phone]
[phone]	[phone]	[phone]

Taped Replay Password: 18993006

About China Health Labs & Diagnostics Ltd.

China Health, operating in China as the Biochem Group, is a leading diagnostic lab solution provider for the public healthcare industry in China. The Company develops and sells Biochem Group branded and third-party medical diagnostic products and services to diagnostic facilities in China. Customers include large urban hospitals, rural hospitals, Chinese military and rescue operations, the Beijing government and third-party distributors.

In 2012, China Health had revenue of approximately $45.8 million, and intends to expand its business by focusing its efforts on expanding its sales network in three areas where it provides proprietary solutions, has limited competition and that are supported by Chinese government policy and budgets: BK Clinlab total lab solutions for rural hospitals and clinics, POCT solutions for military and emergency rescue services, and food safety solutions for large cities in China.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

FORWARD LOOKING INFORMATION

This news release contains forward-looking statements and information that are based on the beliefs of management and reflect China Health's current expectations. When used in this news release, the words "estimate", "project", "belief", "anticipate", "intend", "expect", "plan", "predict", "may" or "should" and the negative of these words or such variations thereon or comparable terminology are intended to identify forward-looking statements and information. The forward-looking statements and information in this news release includes information relating to the Company's resumption of growth, the Company's future growth prospects and expansion plans including hiring and training new employees and setting up operations in new areas; an increase in R&D expenses as the Company seeks to incorporate new technology into its product development and taking several years to go to market if at all; the need to access additional debt or equity funding if the Company seeks to accelerate its growth, if it enters into an agreement for a large number of total lab solutions or if it pursues suitable acquisition opportunities; resume growth in revenues and profits and the building of its leading position in China in providing total lab solutions for rural hospitals and clinics, POCT solutions for military and emergency services, and food safety lab solutions; expansion of the Company's business by focusing on expanding its sales network to additional Chinese provinces and cities in the areas where it has proprietary products and limited competition; the revenue growth from the Company's total lab solutions business lines to continue to be stronger than growth from its traditional business with large urban hospitals, and to comprise a higher percentage of revenues; expected sales in the fourth quarter will be stronger than in the previous three quarters and the performance for fiscal year 2013 is expected to be weaker than the previous year. The forward-looking information is based on certain assumptions, which could change materially in the future, including the assumption that the Company's products and services, operations, market, marketing plans and strategies, competitive conditions, future developments and proprietary protections continue as projected. Such statements and information reflect the current view of China Health with respect to risks and uncertainties that may cause actual results to differ materially from those contemplated in those forward-looking statements and information. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or other future events, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the risk that the Company's future growth prospects may not be as expected, the Company may not proceed or alter its growth strategy, the Company's R&D expenses may increase higher than expected and  such R&D may not result in product development that will successfully enter the market if at all, the Company may not be able to obtain any required financing to accelerate growth on acceptable terms or at all, gross margins, revenues and profits may not continue to increase or increase less than expected, costs and expenses may increase greater than expected, and the Company may not be able to expand its business as expected through its sales network in any of the areas in which it has proprietary products, limited competition and strong government support. These and other risks are further described under "Risk Factors" in the Company's management's discussion and analysis dated April 30, 2013, which is available on SEDAR and may be accessed at www.sedar.com. When relying on China Health's forward-looking statements and information to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. China Health has assumed a certain progression, which may not be realized. It has also assumed that the material factors referred to above will not cause such forward-looking statements and information to differ materially from actual results or events. However, the list of these factors is not exhaustive and is subject to change and there can be no assurance that such assumptions will reflect the actual outcome of such items or factors.

THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS NEWS RELEASE REPRESENTS THE EXPECTATIONS OF CHINA HEALTH AS OF THE DATE OF THIS NEWS RELEASE AND, ACCORDINGLY, IS SUBJECT TO CHANGE AFTER SUCH DATE.  READERS SHOULD NOT PLACE UNDUE IMPORTANCE ON FORWARD-LOOKING INFORMATION AND SHOULD NOT RELY UPON THIS INFORMATION AS OF ANY OTHER DATE.  WHILE CHINA HEALTH MAY ELECT TO, IT DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME EXCEPT AS REQUIRED IN ACCORDANCE WITH APPLICABLE LAWS.

 

SOURCE: CHINA HEALTH LABS & DIAGNOSTICS

Chao Zhang
Chief Financial Officer
China Health Labs & Diagnostics Ltd.
T: [phone]
Email: [email protected]