China Pharma Holdings revenue decreases 7.4% to $5.7 million in Q2 2015

Aug 14 2015

China Pharma Holdings, Inc. (NYSE MKT: CPHI) ("China Pharma" or the "Company"), an NYSE MKT listed corporation with its fully-integrated specialty pharmaceuticals subsidiary based in China, today announced financial results for the quarter ended June 30, 2015.

Second Quarter Highlights

• Revenue decreased 7.4% to $5.7 million in the second quarter of 2015 from $6.1 million in the second quarter of 2014.
• Gross loss was ($0.06) million in the second quarter of 2015, compared to gross profit of $2.4 million in the second quarter of 2014.
• Loss from operations was $3.8 million in the second quarter of 2015 compared to $8.5 million in the second quarter of 2014.
• Net loss was $4.1 million in the second quarter of 2015 compared to $8.6 million in the second quarter of 2014. Loss per common share was $0.09 per basic and diluted share in the second quarter of 2015 compared with $0.20 per basic and diluted share in the same period of 2014.

"Our cost and expenses have experienced certain increase in this quarter due to the new GMP standards for quality control improvement, which lead to an increase in our production costs and the increased sales efforts to recover market shares." said Ms. Zhilin Li, China Pharma's Chairman and CEO. Ms. Li continued, "Although the financial performance in this quarter did not immediately reflect the material change of our production ability, through continuing efforts, we are very confident on recovering and expanding market. And the CNY 9.6 million (approximately USD 1.6 million) government subsidies we received in July 2015 also reflects the recognition from government on the fundamentals of our business. In addition, we also plan to upgrade the cephalosporin, and granule production line in our old factories by the end of this year. "

Second Quarter Results

Revenue for the three months ended June 30, 2015 was $5.7 million, a decrease of 7% from $6.1 million for the three months ended June 30, 2014. This was mainly because we were in the middle of the GMP upgrading process starting from 2014 and, as a result, we missed some drug tenders in several provinces, which affect the sales of subsequent quarters.

For the three months ended June 30, 2015, our cost of revenue was $4.5 million, or 80% of total revenue, which represented an increase of $0.8 million from $3.7 million, or 61% of total revenue, in the second quarter of 2014. The increase in cost of revenue in the second quarter of 2015 was mainly caused by the introduction of new GMP standards for quality control improvement, which leads to an increase in our production costs, such as energy consumption and depreciation.

There was $1.2 million of inventory obsolescence recorded for the three months ended June 30, 2015, and no inventory obsolescence for the three months ended June 30, 2014. We started recording inventory obsolescence allowance on a quarterly basis from the first quarter of 2015 as we believe it may result in material modification in our financial statements; while previously, we tested and recorded inventory obsolescence allowance on an annual basis.

Gross loss for the three months ended June 30, 2015 was $0.06 million, compared to gross profit of $2.4 million in the same quarter of 2014. Our gross loss margin in the second quarter of 2015 was (1%) compared to gross profit margin of39% in the same period 2014. Without considering the effect of inventory obsolescence in the three months ended June 30, 2015, management estimates that our gross profit margin would have been approximately 20% in this period. The decrease in gross profit margin was mainly due to the increase in production costs incurred to comply with the new GMP requirements, increased lower margin products sold in this period, as well as the inventory obsolescence incurred in the second quarter of 2015.

Our selling expenses for the three months ended June 30, 2015 were $1.0 million, compared to $0.6 million in the same period last year. Selling expenses accounted for 18% of the total revenue in the second quarter 2015 compared to 10% in the same period 2014. Due to many adjustments in our selling processes under healthcare reform policies, despite the decrease in sales, we still rely on fixed personnel and expenses to support our revenue and collection of accounts receivable. In addition, once received new GMP certificate, we are aiming to recover our market and therefore requires to invest more sales expenses and marketing efforts.

Our research and development expenses for the three months ended June 30, 2015 was $0.2 million, compared to $1.9 million in the same period last year. The change in research and development expenses was mainly due to the costs related to testing of the new production lines in the second quarter 2014, while no such expenses incurred in this period because we have received the GMP certificates for those production lines.

Our bad debt expenses for the three months ended June 30, 2015 and 2014 were $2.1 million and $8.0 million, respectively. The decrease in bad debt expenses was mainly due to the decrease in aged accounts receivable balance which has not been allowed against previously during the three months ended June 30, 2015, as compared to the same period of 2014. In order to collect cash to support the construction of our new plant and to meet the policy requirements for new GMP upgrading, we have shifted to prudent sales strategies in the recent two years. This strategy strengthened the preference on sales to customers with good credit performance, while reduced the supplement to customers with poor credit. On the one hand, this strategy contributed to the recovery of funds; on the other hand, it negatively impacted our sales and indirectly prolonged the payment from the estranged customers. These two factors resulted in increased proportion of our older-aged accounts receivable balance.

Net loss for three months ended June 30, 2015 and 2014 was $4.1 million and $8.6 million, respectively. The decrease in net loss was primarily due to the decrease in bad debt expenses and partially offset by the inventory obsolescence recognized in the second quarter of 2015. For the three months ended June 30, 2015, loss per basic and diluted common share was $0.09, compared to loss per basic and diluted share of $0.20 for the same period 2014.

Six Months Results

Revenue for the six months ended June 30, 2015 was $11.4 million, down 14% from revenue of $13.2 million for the six months ended June 30, 2014.

Gross profit for the six months ended June 30, 2015 was $1.0 million, compared to $5.0 million in the same period of 2014. Gross profit margin for the six months ended June 30, 2015 and 2014 were 9% and 38%, respectively. Without considering the effect of inventory obsolescence in the first half of 2015, management estimates that our gross profit margin would have been approximately 21%. The decrease in gross profit margin was mainly due to the increase in production costs incurred to comply with the new GMP requirements, more lower margin products sold in this period, as well as the inventory obsolescence incurred in the first half of 2015.

Operating loss was $11.5 million for the six months ended June 30, 2015, decreased by $0.6 million from $10.8 million for the same period of 2014.

Net loss was $12.1 million, or $0.28 per basic and diluted share for the six months ended June 30, 2015, compared to $11.0 million, or $0.25 per basic and diluted share, for the same period a year ago.

Financial Condition

As of June 30, 2015, the Company had cash and cash equivalents of $4.5 million, compared to $5.3 million as of December 31, 2014. Working capital decreased to $29.9 million in June 30, 2015 from $40.3 million in December 31, 2014 and the current ratio was 3.1 times at June 30, 2015, decreased from 3.8 times as of December 31, 2014.

Our accounts receivable balance decreased to $17.2 million as of June 30, 2015 from $24.9 million as of December 31, 2014. Our receivables decreased due to the decrease in sales, our enhanced collection efforts, and the increase in bad debt allowance.

SOURCE China Pharma Holdings, Inc.