CHO China Health Labs And Diagnostics Ltd

TSX-V: CHO

TORONTO, May 31, 2013 /CNW/ - China Health Labs & Diagnostics Ltd. ("China Health" or the "Company") (TSXV:CHO), is pleased to announce the financial results for the three months ended March 31, 2013.

Highlights for the quarter ended March 31, 2013 include:

• Revenue decreased to $5.350 million for the quarter ended March 31, 2013 compared to $7.883 million for the quarter ended March 31, 2012 and profit decreased by 282% to a loss of $1.405 million.
• Gross margins as a percentage of revenue increased to 56% for the quarter ended March 31, 2013 from 53% for the quarter ended March 31, 2012.
• Earnings per share decreased to a loss of $0.01 per basic and diluted share for the quarter ended March 31, 2013 compared to earnings per share of $0.01 for the quarter ended March 31, 2012.
• Increased installed base of BK Clinlabs to 932 rural hospitals by installing an additional 4 BK Clinlabs in Jilin Province in 2013.  The Company concluded agreements to install an additional 79 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.

Sales seasonality in China for almost all industries is impacted by Chinese New Year, which is the major national holiday in China, and depending on the Chinese lunar calendar, will generally start in the last week of January or first two weeks of February. During Chinese New Year, a large percentage of factories are shut down and most sales and service activities are put on hold. Further, the Chinese central government generally completes and releases their annual budgets after Chinese New Year in March of each year. During the first quarter of the year, most of the Company's revenue from the Chinese central government typically is from large sales orders from the previous year that are being completed, or from smaller sales orders to fill urgent needs.  Most of the Company's larger sales orders are confirmed after the annual Chinese government budgets are set and released after March of each year.

As a result of the above factors, the Company's first quarter revenue is generally the lowest as a percentage of annual revenue, and the third and fourth quarters, when the Company is working to deliver sales orders confirmed after the budgeting process, tend to comprise the largest percentage of revenue. For an example, revenue for the quarter ended March 31, 2012 accounted for approximately 17% of total revenue and 11% of profit, or $45.781 million and $6.829 million respectively, while the fourth quarter accounted for approximately 43% of total revenue and 44% of profit for the year ended December 31, 2012. During the fiscal year 2012, the 18th National Congress of the Communist Party of China 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, and these meetings involved a change in leadership at all levels. As the Company's total lab solution businesses are primarily sold to the PRC government and related entities, the change in leadership has had an effect on the Company's business as many administrative processes and decisions were delayed. The Company expects a similar seasonality of revenue and profit in the current year and that the Company will resume growth during the fiscal year 2013. For further information on seasonality, please see the Company's financial statements and MD&A filed on SEDAR.

"The Company has continued to expand its business to new provinces and regions in China in our rural hospitals and clinics sector," said Wilson Yao, CEO of China Health. "We are pleased to enter into contracts with the Inner Mongolia Autonomous Region and with Yunnan Province to install a total of 11 BK Clinlabs in health centres. The Company expects to expand in these areas once the local customers recognize the overall benefits of the BK Clinlabs to operational revenue of the health centres on the expectation that the BK Clinlabs will improve traffic and health procedures".

Revenue for the quarter ended March 31, 2013 decreased to $5.350 million, compared to $7.883 million for the quarter ended March 31, 2012. The decrease in revenue is largely due to decreased sales in the rural hospital and clinics business sector, with decreased sales of approximately $2.184 million, with 49 BK Clinlabs and 63 Rural Mobile Labs installed during the quarter ended March 31, 2012 and only 4 BK Clinlabs installed during the quarter ended March 31, 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 quarter ended March 31, 2013 decreased by 28% to $3.003 million compared to $4.147 million for the quarter ended March 31, 2012. Gross margins decreased due to slower sales during the quarter ended March 31, 2013. Gross margin as a percentage of revenue for the quarter ended March 31, 2013 was 56%, compared to 53% for the quarter ended March 31, 2012.  The increase in gross margin as a percentage of revenue was due to higher margins for diagnostic lab equipment sold to large urban hospitals sold in the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012.

Administrative expenses for the quarter ended March 31, 2013 increased by 54% to $2.996 million, compared to $1.940 million for the quarter ended March 31, 2012. The principal reason for the increase was higher overhead costs including new employees and expanded facilities to support a growing customer base and sales. Administrative expenses as a percentage of revenue increased to 56% for the quarter ended March 31, 2013, in comparison to 25% for the quarter ended March 31, 2012. 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 involve 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.

Research and development ("R&D") expenditure for the quarter ended March 31, 2013 increased by 127% to $0.589 million, compared to $0.259 million for the quarter ended March 31, 2012. Research and development expenses as a percentage of revenue was approximately 11% for the quarter ended March 31, 2013, compared to 3% for the quarter ended March 31, 2012. Research and development expenses are higher as the Company invests its resources in developing new products and also in improving current products to meet an ever evolving healthcare market in China. Research and development expense 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.

Selling expenses for the quarter ended March 31, 2013 increased by 32% to $0.982 million, compared to $0.745 million for the quarter ended March 31, 2012. Selling expenses as a percentage of revenue was 18% for the quarter ended March 31, 2013, compared to 9% for the quarter ended March 31, 2012. Selling expenses is 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 quarter ended March 31, 2013 was $0.125 million, compared to $0.371 million for the quarter ended March 31, 2012. The decrease in income taxes is due to an overall decrease in taxable income.

Operating profit for the quarter ended March 31, 2013 decreased by 229% to a loss of $1.563 million, compared to a profit of $1.207 million for the quarter ended March 31, 2012. Profit for the quarter ended March 31, 2013 decreased by 282% to a loss of $1.405 million, compared to a profit of $0.772 million for the quarter ended March 31, 2012. Profit includes operating profit, interest expense, interest income and foreign exchange gain/loss. Loss for the quarter ended March 31, 2013 represents 26% of revenue, compared to profit of 10% of revenue for the quarter ended March 31, 2012. The decrease in operating profit and profit for the quarter ended March 31, 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 $0.01 for the quarter ended March 31, 2013, compared to earnings per share of $0.01 for the quarter ended March 31, 2012. EPS was lower for the fiscal year 2012 as compared to the fiscal year 2011 due to lower profit. The average number of basic ordinary shares outstanding for the quarter ended March 31, 2013 was 65,606,686 (fully diluted 65,606,686), compared to 65,606,686 (fully diluted 65,607,087) average shares outstanding for the quarter ended March 31, 2012.

Cash totaled $6.924 million as at March 31, 2013, compared with $10.817 million as of December 31, 2012.  The Company's working capital as of March 31, 2013 was $28.703 million, compared with a $29.608 million working capital as of December 31, 2012.  Working capital decreased by $0.905 million, or 3%, mainly due to $3.893 million decrease in cash, $0.307 million increase in deferred revenue, $0.232 million increase in amounts due to related party, which was offset by $1.499 million increase in inventories, $0.962 million increase in deposits and prepayments, $0.328 million increase in deferred tax asset and $0.703 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 believes that for the fiscal year 2013 it can resume growth in revenue and profits and 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 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 revenue.

China Health will be hosting an investor conference call on Friday, May 31^st, 2013 at 10:00 am (Eastern Time).

The purpose of this conference call will be to provide investors with an update on quarter ended March 31, 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 May 31, 2013, to 11:59 pm Eastern Time on June 14, 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; 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; expansion 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, 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