China Pharma's revenue decreases 19.5% to $4.8 million in Q3 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 the financial results for the quarter ended September 30, 2015.

Third Quarter Highlights

• Revenue decreased 19.5% to $4.8 million in the third quarter of 2015 from $5.6 million in the third quarter of 2014.
• Gross profit was $0.3 million in the third quarter of 2015, compared to gross profit of $1.5 million in the third quarter of 2014.
• Loss from operations was $3.9 million in the third quarter of 2015 compared to $6.0 million in the third quarter of 2014.
• Net loss was $4.1 million in the third quarter of 2015 compared to $6.3 million in the third quarter of 2014. Loss per common share was $0.10 per basic and diluted share in the third quarter of 2015 compared with $0.15 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 our 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 improvement of our production ability, through continuous efforts, we are very confident on recovering and expanding market. The CNY 9.6 million (approximately USD 1.6 million) government subsidies we received in July 2015 also reflects the recognition from the government on the fundamentals of our business. In addition, we are currently upgrading the granule and cephalosporin production lines in our old factories, and expect to receive new GMP certificates for the two production lines by the end of this year. "

Third Quarter Results

Revenue for the three months ended September 30, 2015 was $4.5 million, a decrease of 19.5% from $5.6 million for the three months ended September 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 the subsequent quarters.

For the three months ended September 30, 2015, our cost of revenue was $3.7 million, or 83% of total revenue, which represented a decrease of $0.3 million from $4.1 million, or 73% of total revenue, in the third quarter of 2014. The increase in the percentage of cost to revenue in the third 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 $0.4 million of inventory obsolescence recorded for the three months ended September 30, 2015, and no inventory obsolescence for the three months ended September 30, 2014. We previously tested and recorded inventory obsolescence allowance on an annual basis. We started recording inventory obsolescence allowance on a quarterly basis during the first quarter of 2015 as we believe otherwise it may result in material modification in our financial statements at the interim periods.

Gross profit for the three months ended September 30, 2015 was $0.03 million, compared to $1.5 million in the same period of 2014. Our gross profit margin in the third quarter of 2015 was 7.2% compared to 27.1% in the same period of 2014. Without considering the effect of inventory obsolescence in the three months ended September 30, 2015, management estimates that our gross profit margin would have been approximately 16.9% 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, as well as the inventory obsolescence incurred in the third quarter 2015.

Our selling expenses for the three months ended September 30, 2015 were $1.2 million, compared to $0.7 million in the same period last year. Selling expenses accounted for 25.8% of the total revenue in the third quarter 2015 compared to 13.4% 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, after receiving new GMP certificates, we are aiming to recover our market share and therefore require more sales expenses and marketing efforts.

Our research and development expenses for the three months ended September 30, 2015 were $0.4 million, compared to $0.2 million in the same period last year. The change in research and development expenses was mainly due to the costs related to some consumption goods purchased by our laboratory incurred in this quarter; while no comparable expenses incurred in the third quarter 2014.

Our bad debt expenses for the three months ended September 30, 2015 and 2014 were both $3.9 million. 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.

The Company received USD 1.6 million subsidy income in the three months ended September 30, 2015, mainly in the name of an interest discount due to the technological innovation we have achieved and the industrial upgrading related to our new GMP; while in the same period 2014, we received USD 0.07 million subsidy income.

Net loss for three months ended September 30, 2015 and 2014 were $4.1 million and $6.3 million, respectively. The decrease in net loss was primarily due to the increase in subsidy income and partially offset by the decrease in revenue in the third quarter of 2015. For the three months ended September 30, 2015, loss per basic and diluted common share was $0.10, compared to loss per basic and diluted share of $0.15 for the same period in 2014.

Nine Months Results

Revenue for the nine months ended September 30, 2015 was $15.8 million, down 16% from revenue of $18.8 million for the nine months ended September 30, 2014.

Gross profit for the nine months ended September 30, 2015 was $1.3 million, compared to $6.6 million in the same period of 2014. Gross profit margin for the nine months ended September 30, 2015 and 2014 were 8% and 35%, respectively. Without considering the effect of inventory obsolescence in the nine months ended September 30, 2015, management estimates that our gross profit margin would have been approximately 20%. 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 for the nine months ended September 30, 2015.

Operating loss was $15.4 million for the nine months ended September 30, 2015, decreased by $1.5 million from $16.9 million for the same period of 2014.

Net loss was $16.2 million, or $0.37 per basic and diluted share for the nine months ended September 30, 2015, compared to $17.4 million, or $0.40 per basic and diluted share, for the same period a year ago.

Financial Condition

As of September 30, 2015, the Company had cash and cash equivalents of $5.7 million, compared to $5.3 million as of December 31, 2014. Working capital decreased to $23.7 million in September 30, 2015 from $40.3 million in December 31, 2014 and the current ratio was 2.5 times at September 30, 2015, decreased from 3.8 times as of December 31, 2014.

Our accounts receivable balance decreased to $11.8 million as of September 30, 2015 from $24.9 million as of December 31, 2014. The decrease was due to the decrease in sales and the increase in bad debt allowance.