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Press release from CNW Group

China Health Labs & Diagnostics Ltd. announces financial results for the three and nine months ended September 30, 2011

Wednesday, November 30, 2011

China Health Labs & Diagnostics Ltd. announces financial results for the three and nine months ended September 30, 201108:00 EST Wednesday, November 30, 2011TSX-V: CHOOTCQX: CHLBFwww.chinahealthlabs.comTORONTO, Nov. 30, 2011 /CNW/ - China Health Labs & Diagnostics Ltd. ("China Health" or the "Company") (TSXV: CHO) (OTCQX: CHLBF), is pleased to announce the financial results for the three and nine months ended September 30, 2011.The Company made progress in its mission of becoming a leading provider of total solutions for medical diagnostics and food safety testing in China and achieved its business and financial goals for the three and nine months ended September 30, 2011. Highlights include the following:Revenue grew by 23% to $10.772 million and profit grew by 46% to $1.592 million for the three months ended September 30, 2011, compared to the same period last year;Revenue grew by 42% to $25.626 million and profit grew by 66% to $4.228 million for the nine months ended September 30, 2011 compared to the same period last year;Completed installation of 587 BK Clinlab total lab solutions in rural hospitals in Jilin Province, China by August 2011 to increase installed base to 797 labs, up from 210 locations at the start of 2011;Revenues from point of care technology ("POCT") diagnostic solutions grew by 146% for the nine month period ended September 30, 2011 compared with the same period in 2010, including sales to the Chinese military and to new customers acquired in 2011 being, the China's National Emergency Rescue Team, Chinese Armed Police Force and the Beijing Emergency Affairs Office.Subsequent to the end of the third quarter, signed a $10.0 million (RMB 61.5 million) sales order to deliver food safety total lab solutions to the Beijing municipal government."We are pleased to report that our strong growth in the first nine months and third quarter was driven by our investments in developing diagnostic total solutions that meet our customer's needs, rather than selling individual products.  As a first mover we have limited competition in providing diagnostic total solutions that combine equipment, installation, training, our proprietary lab management system and ongoing service and reagents" said Wilson Yao, CEO of China Health. "The value we are providing is recognized in our growth of revenues and margins.  We believe that the future growth of the Company will be driven by revenues and profits from the proprietary solutions we have developed."Revenue for the three and nine months ended September 30, 2011 increased by 23% to $10.772 million and by 42% to $25.626 million, respectively, compared to the same periods last year. The growth in revenues was largely due to increased sales of POCT solutions and the completion of the contract to install 587 BK Clinlabs in Jilin Province.  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 revenues being the smallest due to the budgeting process of the Company's customers and Chinese New Year holidays, and the fourth quarter revenues expected to be the largest due to deliveries of products and services that have been ordered during the year.  Revenues for the three and nine months ended September 30, 2010 accounted for approximately 26% and 54% respectively of total revenues of $33.705 million for the year ended December 31, 2010.Gross margin for the three and nine months ended September 30, 2011 increased by 130% to $4.266 million and by 99% to $11.459 million respectively, compared to the same periods last year mostly due to the increased sales of POCT solutions and BK Clinlab rural total lab solutions in the current nine months ended September 30, 2011.Gross margin as percentage of revenues for the three and nine months ended September 30, 2011 was 40% and 45%, respectively compared to 21% and 32% for the same periods last year. The increase in gross margin as a percentage of revenue was due to changes in sales mix.  The higher gross margin as a percentage of revenue for the three and nine months ended September 30, 2011 was largely due to strong growth in high margin POCT solution sales and the completed installation of the 587 BK Clinlabs. Revenues from the Company's total lab solutions were approximately 72% and 61% of total revenues for the three and nine months ended September 30, 2011, respectively, compared to 19% and 23% for the prior comparable periods. In the three and nine months ended September 30, 2010, the Company sales mix largely consisted of sales of in-vitro diagnostic equipment to large urban hospitals, which generate lower gross margin as compared to the sales of total lab solutions.In 2010, revenue from the total lab solutions grew by close to 100% and accounted for approximately 41% of total annual revenues of $33.7 million.  In 2011, revenue from total lab solutions for rural hospitals, POCT solutions for military and emergency services and food safety total lab solutions is expected to account for an increasing percentage of total annual revenues.   The Company expects that gross margin as a percentage of revenues for fiscal year 2011 will be comparable or higher than the gross margin for fiscal year 2010, which was 39%, due to the strong margins generated by the total lab solutions.Administrative expenditures for the three and nine months ended September 30, 2011 increased by 77% to $1.416 million and by 88% to $4.161 million, respectively, compared to the same periods last year. The principal reason for the increase was increased overhead including employees and facilities to support a growing customer base and sales, as well as additional costs associated with being a public company on the TSX-V since October 2010. Administrative expenses as a percentage of revenues increased to 13% and 16% for the three and nine months ended September 30, 2011, respectively, in comparison to 9% and 12% for the comparative periods last year.Research and development expenditures for the three and nine months ended September 30, 2011 were $0.111 million and $0.451 million, respectively, an increase of 71% and 128% as compared to the same periods last year.  Research and development expense as a percentage of revenues were approximately 1% for the three months ended September 30, 2011, about the same as the comparable period last year. Research and development expense as a percentage of revenues increased to 2% for the nine months ended September 30, 2011, compared to about 1% for the nine months ended September 30, 2010.In 2010, research and development focused on POCT products for the Chinese military and improving the automation for certain diagnostic equipment. In 2011, research and development is focused on developing 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 tailor made to customer needs.In late 2010, the Company signed a three-year research and development agreement with the Chinese Military Medical Equipment Research Institute (the "Institute"), based in Tianjin, and with the Third Military Medical University (the "University"), based in Chongqing. The program has four main goals: to improve the "Type B" diagnostic field lab; to develop a new mobile diagnostic lab to be contained in a vehicle; to evaluate and improve reagents; and, to develop a standard training program for military POCT field applications.  The budget for the three-year program is RMB 10 million ($1.628 million), with China Health providing RMB 2 million ($0.326 million) and the Chinese military providing RMB 8 million ($1.302 million).  China Health is providing three research scientists and the core technology. The R&D is being conducted in labs provided by the Institute and the University in Tianjin and Chongqing, including full science and technology teams.  Under the agreement, China Health will own all of the intellectual property resulting from the R&D, including any improvements to the Company's existing technology and solutions.  In addition, China Health will own all marketing and manufacturing rights and will have no restrictions on China domestic and international markets.During the nine months ended September 30, 2011, the Company developed and launched their new Type B POCT diagnostic field lab which is slated to replace the Type A POCT diagnostic field labs. The Company continues to work closely with its customers to develop new and improved solutions.Selling expenses for the three and nine months ended September 30, 2011 increased by 172% to $0.632 million and by 99% to $1.281 million, respectively, compared to the same periods last year. Selling expense as a percentage of revenues was 6% and 5% for the three and nine months ended September 30, 2011, respectively, compared to 3% and 4% for the same periods last year, respectively. Selling expenses are expected to increase in subsequent quarters due to plans to expand the rural lab solution business to additional Chinese provinces and the food safety business to additional Chinese cities.Share-based compensation for the three and nine months ended September 30, 2011 was $0.190 million and $0.601 million, respectively, compared with $Nil for the comparable periods last year.The share-based compensation expense is a result of granting stock options to its directors, officers and consultants in October 2010 and September 2011 and to employees and consultants in April 2011. The fair value of options granted on October 25, 2010 was estimated on the date of grant at $0.718 million, of options granted on April 14, 2011 was estimated on date of grant at $0.607 million and of options granted on September 1, 2011 was estimated on date of grant at $0.049 million using the Black-Scholes option-pricing model. The fair values of options are expensed over the vesting period ending on October 25, 2011, April 14, 2014 and September 1, 2014, respectively.  No options were granted by the Biochem Group prior to the completion of the Qualifying Transaction in October 2010, hence there was no share-based compensation in the comparative period.Government subsidy income for the three and nine months ended September 30, 2011 was $0.054 million and $0.134 million, respectively, compared with $0.333 million and $0.375 million, respectively, for the comparable periods last year. From time to time, the Company will receive government subsidy on one of the PRC subsidiaries' value-added taxes collected on sales. A substantial government subsidy is calculated based on one of the PRC subsidiaries' value-added taxes collected on sales.Current income tax expense for the three months ended September 30, 2011 was $0.142 million compared with income tax recovery of $0.067 million for the comparable period last year.  The recovery in current income tax for the prior period is mainly due to the utilization of loss carryforward. Current income tax expense for the nine months ended September 30, 2011 was $0.432 million compared with $0.343 million for comparative period last year.  The decrease in income taxes is mainly due to an overall increase in income being earned by the legal entities which are subject to preferential tax rates.The Company's PRC subsidiaries are subject to income taxes at a statutory tax rate of 25% 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% 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% 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% reduced tax rate.Profit for the three and nine months ended September 30, 2011 increased by 46% to $1.592 million and by 66% to $4.228 million, respectively, compared to the same periods last year.  Profit in the current three and nine months ended September 30 represents 15% and 16% of gross revenue, respectively, compared to 12% and 14% of gross revenue for the comparable periods last year, respectively.The increase in profit is due to the growing customer base and sales, and to the growth in sales of rural labs solution and POCT total lab solutions, which generate higher margins than the Company's other products and solutions. Profit as a percentage of revenues was slightly higher in the current three and nine months ended September 30, 2011 due to the higher sales mix of rural labs solution and POCT total labs solutions completed in the current periods. However, the higher margins generated were partially offset by higher administrative expenses incurred to support overall increase in the Company's operations, share-based compensation expenses and additional costs associated with being a public Company on the TSX-V since October 2010, which were not incurred during the comparable three months ended September 30, 2010. Profit as a percentage of revenues for the fiscal year 2011 is expected to be comparable to profit as a percentage of revenues in fiscal year 2010 of 16%.Basic and fully diluted EPS was $0.02 and $0.06 for the three and nine months ended September 30, 2011, respectively, compared to $0.02 and $0.05 for the comparable periods last year due to increased profit partially offset by an increase in the average number of shares outstanding during the current period due to becoming a publicly trading company in October 2010, and issuing new shares since October 2010 arising from the exercise of stock options and share purchase warrants.The average number of basic ordinary shares outstanding for the nine months ended September 30, 2011 was 65,261,986 (fully diluted 67,287,479), compared to 52,232,518 basic and fully diluted average shares outstanding for the comparable period last year.Cash and short-term investments totalled $7.059 million as at September 30, 2011, compared with $5.726 million of cash and short-term investments as of December 31, 2010.  The Company's working capital as of September 30, 2011 was $22.713 million, compared with a $16.063 million working capital as of December 31, 2010.  Working capital increased by $6.650 million, or 41%, mainly due to an increase in inventories by $3.371 million and a decrease in deferred revenue by $1.984 million and loans payable by $1.126 million, which was offset by $1.050 million of reduction on short-term investments and $2.927 million increase in trade payables and accrued liabilities.The Company is well positioned to expand its business for rural lab total solutions, POCT lab solutions and food safety lab solutions.  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 for total lab solutions or if it pursues suitable acquisition opportunities.Outlook & Growth StrategyThe 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.China Health continues 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, November 30, 2011 at 10:00am (Eastern Time).The purpose of this conference call will be to provide investors with an update of the third quarter results of the Company. Representatives of China Health on the conference call will be:Mr. Shiping (Wilson) Yao, President and Chief Executive OfficerMs. Judyanna Chen, Chief Financial OfficerMr. Kim Oishi, Member of the Board of DirectorsMr. Chao Zhang, Vice President, FinanceFollowing the update, a question and answer session will be held. To participate, the time and call-in instructions are as follows:DATE: Wednesday, November 30, 2011TIME: 10:00am, Eastern Time  Participant Dial-In Number(s):  North America Toll-Free Dial-In Number: 1 (888) 231-8191 For Toronto and International Callers:  1 (647) 427-7450A Taped Replay will be available from 1:00 pm Eastern Time on November 30, 2011 to 11:59 pm Eastern Time on December 14, 2011.Taped Replay Toll Free Number: 1.855.859.2056Taped Replay Local Dial-in Numbers:(778) 371-8506  (416) 849-0833  (514) 807-9274(403) 451-9481  (613) 667-0035  (902) 455-3955Taped Replay Password: 30217441About 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 2010, China Health had revenues of approximately $33.7 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 INFORMATIONThis press 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 press 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 press release includes information relating to the Company's growth strategy, requirements for financing, changes in gross margin, revenues, expenses and profit, and expansion of the Company's business through its sales network in areas where it has proprietary products, limited competition and strong government support.  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, and that the Company will be able to expand its sales network and business.  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 may not proceed or alter its growth strategy, 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 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.  China Health cautions that the foregoing list of material factors is not exhaustive.  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 PRESS RELEASE REPRESENTS THE EXPECTATIONS OF CHINA HEALTH AS OF THE DATE OF THIS PRESS 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. For further information: Judyanna Chen Chief Financial Officer China Health Labs & Diagnostics Ltd. T: (416) 865-3351 Email: jchen@chinahealthlabs.com Babak Pedram Investor Relations TMX Equicom Group T: (416) 815-0700 ext. 264 Email: bpedram@equicomgroup.com