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

TSX-V: CHO

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

Highlights for the three and six months ended June 30, 2013 include:

• Revenue decreased to $6.298 million for the three months ended June 30, 2013 compared to $8.361 million for the three months ended June 30, 2012 and profit decreased by 261% to a loss of $1.144 million.
• Revenue decreased to $11.647 million for the six months ended June 30, 2013 compared to $16.244 million for the six months ended June 30, 2012 and profit decreased by 272% to a loss of $2.549 million.
• Gross margins as a percentage of revenue decreased to 42% for the three months ended June 30, 2013 from 50% for the three months ended June 30, 2012.
• Gross margins as a percentage of revenue decreased to 49% for the six months ended June 30, 2013 from 51% for the six months ended June 30, 2012.
• Earnings per share decreased to a loss of $0.04 per basic and diluted share for the six months ended June 30, 2013 compared to earnings per share of $0.02 for the six months ended June 30, 2012.
• Increased installed base of BK Clinlabs to 977 rural hospitals by installing an additional 39 BK Clinlabs during the six months ended June 30, 2013.  The Company concluded agreements to install an additional 34 BK Clinlabs to increase the total to 1,011 locations in twelve provinces/ regions to date, compared to 817 locations in four provinces/ regions at the beginning of 2012.

Due to seasonality effects, the Company's first quarter revenue is generally the lowest as a percentage of annual revenue, and the revenue for the second quarter may also be slow as the government commences its annual purchases during the second quarter. The Company delivers sales orders confirmed after the government budgeting process during the third and fourth quarters and as a result, the third and fourth quarters tend to comprise the largest percentage of revenue. For example, revenue for the six months ended June 30, 2012 accounted for approximately 35% of total revenue and 22% of profit, or $16.244 million and $1.481 million respectively, while the third and fourth quarter accounted for approximately 65% of total revenue and 78% of profit for the year ended December 31, 2012. During the fiscal year 2012, the 18th National Congress of the Communist Party of China ("18th National Congress") was held during November 2012, and during the first quarter of fiscal year 2013, the 12th NPC Standing Committee and the 12th Chinese People's Political Consultative Conference were held,  resulting in a change in leadership at all levels of government and re-organizations within certain government departments thereafter, including the China Food and Drug Administration and the National Health and Family Planning Commission. As the Company's total lab solution products are primarily sold to the PRC government and related entities, the change in leadership and re-organization has had an effect on the Company's business. Many government administrative processes and decisions were delayed resulting in the slowdown in sales for the Company. As the new Chinese government takes power and administrative departments return to purchasing and payment processing, the Company expects sales orders and projects to resume during the latter part of fiscal year 2013. For further information on this change, please see the Company's financial statements and MD&A filed on SEDAR.

Revenue for the three and six months ended June 30, 2013 decreased by 25% to $6.298 million and by 28% to $11.647 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, with decreased sales of approximately $2.016 million and $2.656 million, respectively, for the three and six months ended June 30, 2013. During the first six months in 2012, the Company had 80 BK Clinlabs and 63 Rural Mobile Labs installed and only 39 BK Clinlabs installed during the six months in 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 six months ended June 30, 2013 decreased by 37% to $2.648 million and by 32% to $5.650 million, respectively, as compared to the same periods last year. Gross margins decreased due to slower sales during the three and six months ended June 30, 2013. Gross margin as a percentage of revenue for the three and six months ended June 30, 2013 were 42% and 49%, respectively, compared to 50% and 51% 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 our urban hospitals and labs sector during the six months ended June 30, 2013, as compared to 55% of total revenues for the six months ended June 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 six months ended June 30, 2013 increased by 22% to $ 2.248 million and by 39% to $ 5.242 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 six months ended June 30, 2013 was $ 15,000 and $47,000 respectively, compared to $46,000 and $127,000 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 $0.716 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 six months ended June 30, 2013.

Research and development ("R&D") expenditure for the three and six months ended June 30, 2013 increased by 231% to $ 1.093 million and by  186% to $ 1.682 million, respectively, compared to the same periods last year. Research and development expenses are higher as the Company is investing its resources in developing new products and also in improving current products to meet an ever evolving healthcare market in China. Research and development expenses 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 six months ended June 30, 2013 increased by 15% to $0.945 million and by 23% to $1.927 million, respectively, as compared to the same periods last year. Selling expenses are 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 six months ended June 30, 2013 was $0.239 million and $0.364 million, respectively, as compared to the same periods last year, being $0.480 million and $0.851 million, respectively. The decrease in income taxes is due to an overall decrease in taxable income. 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.

Profit for the three and six months ended June 30, 2013 decreased by 261% to a loss of $1.144 million and by 272% to a loss of $2.549 million, respectively, as compared to the same periods last year. Operating profit for the three and six months ended June 30, 2013 decreased by 197% to a loss of $1.226 million and by 213% to a loss of $2.789 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 June 30, 2013 is due to lower revenue and higher expenses spent in the period to expand the total lab solution businesses.

Basic and fully diluted EPS was a loss of $ 0.02 for the three months ended June 30, 2013, compared to earnings per share of $0.01 for the three months ended June 30, 2012. Basic and fully diluted EPS was a loss of $0.04 for the six months ended June 30, 2013, compared to earnings per share of $0.02 for the six months ended June 30, 2012. EPS was lower for the fiscal period 2013 as compared to the fiscal period 2012 due to lower profit. The average number of basic ordinary shares outstanding for the six months ended June 30, 2013 was 65,606,686 (fully diluted 65,606,686), compared to 65,606,686 (fully diluted 65,606,887) average shares outstanding for the six months ended June 30, 2012.

Cash totaled $ 3.458 million as at June 30, 2013, compared with $10.817 million as of December 31, 2012.  The Company's working capital as of June 30, 2013 was $28.202 million, compared with a $29.608 million working capital as of December 31, 2012.  Working capital decreased by $1.406 million, or 5%, mainly due to $7.359 million decrease in cash, $0.880 million increase in deferred revenue, $0.493 million increase in amounts due to related party, which was offset by $3.831 million increase in inventories, $ 2.091 million increase in deposits and prepayments, $1.049 million increase in trade and other receivables and $ 0.636 million decrease in trade payables and accrued liabilities.

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 is pleased to announce that in August 2013, the Company won a bid via its agent to sell approximately 150 BK food safety quick test instruments to the Beijing municipal government. The total sales amount of this bid is expected to be approximately $5.482 million (32 million RMB). The Company expects to deliver these equipment within two months after an agreement is entered.

The Company believes that the orders and projects will resume in the second half year and this will help the Company continually build on the leading position it has established in China in 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 2013, China Health intends to develop 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 revenue.

China Health will be hosting an investor conference call on Tuesday, September 3^rd, 2013 at 10:00 am (Eastern Time).

The purpose of this conference call will be to provide investors with an update on the three and six months ended June 30, 2013 results of the Company. Representatives of China Health on the conference call will be:

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

Participant Dial-In Number(s):

A Taped Replay will be available from 1:00 pm Eastern Time on September 3^rd, 2013, to 11:59 pm Eastern Time on September 17^th, 2013.

Taped Replay Toll Free Number: 1.855.859.2056

Taped Replay Local Dial-in Numbers:

Taped Replay Password: 86571508

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; the sales from and delivery of the food safety testing equipments to the Beijing government; 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; development 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; and 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. 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, winning the bid to sell food safety testing equipment for the Beijing government may not result in an agreement, sales, delivery or revenues; 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