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China Health Labs & Diagnostics Ltd

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Post by Stripeson Jun 29, 2011 2:49pm

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China Health Labs earns $1.22-million in Q1

2011-06-29 09:17 ET - News Release
Shares issued 65,581,686
CHO Close 2011-06-28 C$ 0.66

Mr. Kim Oishi reports

CHINA HEALTH LABS & DIAGNOSTICS LTD. ANNOUNCES FINANCIAL RESULTS FOR THE FIRST QUARTER ENDED MARCH 31, 2011

China Health Labs & Diagnostics Ltd. has released the financial results for the first quarter ended March 31, 2011.

In the first quarter of 2011, the company achieved its business and financial goals, and made progress on its mission of becoming a leading provider of total lab solutions for medical diagnostics and food safety testing in China:

Gross revenues grew by 52 per cent to $6,759,000 in the first quarter of 2011 compared with the first quarter of 2010.
Profit grew by 283 per cent to $1,224,000 in the first quarter of 2011 compared with the first quarter of 2010.
Sales of point-of-care technology (POCT) solutions more than doubled.
Sales of food safety lab equipment increased.
The company prepared for the installation of 587 BK Clinlabs in Jilin province and, subsequent to the end of the first quarter of 2011, installed 200 BK Clinlab rural total lab solutions in Jilin province, increasing the total installed BK Clinlabs to 410 locations in four Chinese provinces.

The company has entered 2011 well positioned for further growth and with sufficient capital to expand its business for rural total lab solutions, POCT lab solutions and food safety lab solutions, including the 587 locations to be installed in Jilin province. The company will need to access additional debt or equity financing if it enters into an agreement for a large number for total lab solutions or if it pursues suitable acquisition opportunities.

"Our investment in developing POCT technology and products lead to a strong first quarter with a new customer, the NERT (National Emergency Rescue Team), ordering 13 Type A POCT solutions, based on our track record of providing the POCT solutions to the Chinese military," said Wilson Yao, president and chief executive officer of China Health. "We believe that in 2011 our growth will be driven by revenues and profits from the proprietary solutions we have developed. After the first quarter, we signed the contract to install 587 BK Clinlabs in Jilin and have already installed 200, and we are on schedule to install all 587 in 2011, compared to 126 BK Clinlabs installed in 2010."

Gross revenue for the first quarter of 2011 increased by 52 per cent to $6,759,000 compared with the same period in 2010. The growth in revenues was largely due to increased sales of the company's proprietary POCT total lab solution for the Chinese military and NERT, which grew by 246 per cent to $2,275,000 to account for 33.7 per cent of revenues in the first quarter of 2011, compared with $657,000 or 14.8 per cent of revenues for the same period in 2010. Increased sales of testing equipment for food safety also contributed to the growth.

The company expects that in 2011 revenue seasonality will be similar to previous years with the first quarter being the smallest due to the budgeting process of the company's customers and Chinese New Year holidays, and fourth quarter revenue expected to be the largest due to deliveries of products and services that have been ordered during the year. In 2010, revenues for the first quarter accounted for approximately 13 per cent of total annual revenues of $33,751,000.

Gross margin increased by 183 per cent to $3,894,000 in the first quarter of 2011 compared with the same period in 2010, due to the increase in revenues and the change in sales mix. Gross margin as percentage of sales increased to 58 per cent for the first quarter of 2011 compared with 31 per cent for the first quarter of 2010, mainly due to the growth in sales of POCT total lab solutions, which generate higher margins than the company's other products and solutions. The company expects that gross margin as a percentage of sales for the full year of 2011 will be close to the same as in 2010 when it was 39.3 per cent.

Administrative expenditures for the first quarter of 2011 were $1,518,000 compared with $771,000 in the first quarter of 2010, an increase of $747,000 or 97 per cent. The principal reason for the increase was a need for an increased amount of overhead, including employees and facilities, to support a growing customer base and sales, as well as additional costs to maintain listing of the company on the TSX Venture Exchange. Administrative expenses as a percentage of revenues increased to 22 per cent for the first quarter of 2011 in comparison with 17 per cent for the comparative period in the first quarter of 2010. Administrative expenses as a percentage of revenues are expected to decrease in subsequent quarters due to higher expected revenues.

Research and development expenditures for the first quarter of 2011 were $328,000, an increase of $281,000 or 598 per cent compared with $47,000 in the first quarter of 2010. Research and development expenses as a percentage of revenues increased to 5 per cent for the first quarter of 2011, compared with about 1 per cent for the first quarter of 2010. Research and development expenses as a percentage of revenues are expected to decrease in subsequent quarters due to higher expected revenues.

In 2010, research and development focused on POCT products for the Chinese military and improving the automation in certain diagnostic equipment. In 2011, research and development is focused on developing a full range of POCT solutions and improving the company's proprietary and patented lab management system. The company is accelerating product development to maintain its competitive advantages in the sectors 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 tailor-made to customer needs. In the first quarter of 2011, the company commenced research and development with the Chinese military pursuant to a three-year research and development agreement signed in late 2010 with the Chinese Military Medical Equipment Research Institute, based in Tianjin, and with the Chongqing Third Military Medical University, based in Chongqing.

Selling expenses for the first quarter of 2011 were $462,000, an increase of $303,000 or 191 per cent from $159,000 in the first quarter of 2010. Selling expenses as a percentage of revenues increased to 7 per cent for the first quarter of 2011, compared with 4 per cent for the same period last year. The increase in selling expenses was due to expanding the rural lab solution sales and marketing teams to additional Chinese provinces and the food safety business to additional Chinese cities. Selling expenses as a percentage of revenues are expected to decrease in subsequent quarters due to higher expected revenues.

Share-based compensation for the first quarter of 2011 was $188,000 compared with nil for the the first quarter of 2010. No options were granted by the Biochem Group prior to becoming a subsidiary of the company and listing on the TSX Venture Exchange in October, 2010, hence there was no stock-based compensation in the comparative period.

Government subsidy income for the first quarter of 2011 was $80,000 compared with $30,000 for the first quarter of 2010. A substantial government subsidy is calculated based on one of the PRC subsidiaries' value-added taxes collected on sales. Increase in government subsidy mainly arose due to increase in sales generated through this particular PRC subsidiary.

Current income taxes for the first quarter of 2011 were $322,000 compared with $57,000 for the first quarter of 2010. The company's PRC subsidiaries are subject to income taxes at a statutory tax rate of 25 per cent in China. Two of the company's PRC subsidiaries have been granted preferential tax rates. One subsidiary is subject to PRC income taxes at 1 per cent of gross sales and another PRC subsidiary is qualified for income tax exemption during the first two years of profitable operations followed by a 50-per-cent 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 year 2008 and 2009 with the years 2010 and 2011 being taxed at the 50-per-cent reduced tax rate. The increase in income taxes is mainly due to an overall increase in income, an increase in non-tax deductible expenses such as share-based compensation as well as expenditures incurred outside of the PRC to maintain the Canadian stock exchange listing.

Profit for the quarter ended March 31, 2011, increased by 283 per cent to $1,224,000 compared with the same period in 2010. Profit in the current period represents 18 per cent of gross revenue, compared with 7 per cent of gross revenue in the first quarter of 2010. The increase in profit and profit margin was mainly due to the growth in sales of POCT total lab solutions, which generate higher margins than the company's other products and solutions. The first quarter is historically the smallest for the company's profits due to the seasonality of its customers' budgeting and purchasing, such that in 2010, the first quarter accounted for 6 per cent of the company's annual net income.

Cash and short-term investments were $3,236,000 as at March 31, 2011, compared with $5,672,600 as of Dec. 31, 2010. The company's working capital as of March 31, 2011, was $17,165,000, compared with a $16,063,000 working capital as of Dec. 31, 2010.

The company has sufficient working capital to finance the anticipated growth for 2011, including the installation of 587 BK Clinlab total lab solutions in Jilin province. However, the company may need to access additional debt or equity financing if it enters into an agreement for a large number for total lab solutions or if it pursues suitable acquisition opportunities.

Outlook and growth strategy

The company believes that it can continue its strong 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.

In 2011, 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 Wednesday, June 29, 2011, at 10 a.m. Eastern Time. The purpose of this conference call will be to provide investors with an update of the first quarter results of the company. Representatives of China Health on the conference call will be: