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China Pharma Holdings, Inc. (NYSEMKT:CPHI)

Q1 2014 Earnings Conference Call

May 15, 2014 08:30 PM ET

Executives

Diana Huang - IR Manager

Ms. Zhilin Li - President, CEO and Interim CFO

Sam Hsing - CVP

Analysts

Operator

Ladies and gentlemen, thank you all for standing-by and welcome to the Quarter One 2014 China Pharma Holdings Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today, the, 15 of May, 2014. I would now like to hand the conference over to your speaker for today Ms. Diana Huang. Thank you. Please go ahead ma’am.

Diana Huang

Thank you, operator. Good morning ladies and gentlemen and good evening to those of you joining us from China. Welcome to China Pharma Holdings’ first quarter 2014 earnings conference call. I am Diana Huang, the Company’s Investor Relations Manager. Speaking on the call today are China Pharma’s President and CEO and Interim CFO, Ms. Zhilin Li and Corporate Vice President, Mr. Sam Hsing. In addition, I will provide translation during the Q&A session of the call. The Company’s earnings press release issued earlier this morning is available on our website at www.chinapharmaholdings.com.

I would like to remind our listeners that on this call management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks as market and customer acceptance and demand for our products, our ability to market our product, the impact of competitive products and pricing, the ability to develop and launch new products on a timely basis, the regulatory environment including government regulation in the PRC, our ability to obtain the requisite regulatory approvals to commercialize our products, fluctuations in operating results including spending for research and development and sales and marketing activities, and other risks detailed from time-to-time in the filings with the SEC.

In addition, any projections as to the Company’s future performance represent management’s estimate as of today, May the 15, 2014. China Pharma assumes no obligation to update those projections in the future as market conditions change. Now, it is my pleasure to turn the call over to China Pharma’s CEO and Interim CFO, Ms. Li to make her opening remarks in Chinese, and will then be translated by Sam. Afterwards, Sam will continue translating Ms. Li’s detailed discussion of the Company’s first quarter 2014 financial results.

Zhilin Li

Thank you, Diana.

[Foreign Language]

Sam Hsing

Thank you, Diana and good morning everyone. I would like to thank each of you for joining us today and for continued support of China Pharma. We have maintained a conservative stance in our general sales and credit policy in the first quarter of 2014 in order to ensure the capital requirement for new GMP upgrading requirements and to continue and improve the condition of our accounts receivable. Construction of the main building for our new GMP facility has been basically completed, and two new sterilization production lines has been installed, and are undergoing testing and commissioning. We intend to submit the application for the new GMP certificate in June 2014. We believe that the GMP upgrading will be successful and expect the new GMP certificate to be issued in approximately three to six months from our submission of the application. As of January 1, 2014, we suspended production on our two existing lines due to the failure to meet the GMP upgrading deadline. We intend to upgrade these lines after production commences on the lines in our new facility.

I will now read results from Ms. Li's prepared remarks in English.

Revenues for the first quarter 2014 was $7.1 million a decrease of 14% from revenue of $8.2 million for same period in 2013. Although CNS cerebral cardiovascular and digestive disease categories decreased in sales this quarter, antiviral infection in respiratory and other categories recognized sales increase in this period compared to first quarter in 2013 due to the markets fluctuation. The decrease in revenue slowed down compared to the prior quarters.

Our cost of revenue was $4.4 million, or 63% of total revenue in the first quarter of 2014, which represented a decrease of $1.7 million from $6.1 million, or 74% of total revenue, in the first quarter of 2013. The decrease in cost of revenue in the first quarter of 2014 was mainly due to a decrease in purchasing prices of certain raw materials due to market fluctuation.

Gross profit for the first quarter in 2014 was $2.7 million, an increase of $4.2 million, from gross loss of $1.6 million in the same period of 2013. Our gross profit margin in the first quarter of 2014 was 37% compared to gross loss margin of 19% in the same period 2013. The increase in gross margin was mainly due to the lack of inventory obsolescence in the first quarter 2014, decreased in purchasing prices of certain raw materials and increase in selling prices of certain products in this period.

Going forward we expect to see continued pricing pressure on most products while new products will help to support overall gross margin once they are launched. The launch started in November 2013 and started its marketing activities.

Selling, general and administrative expenses were $1.2 million, or 18% of sales in the first quarter of 2014, compared to $1.4 million, or 17% of sales, in the same period in 2013. The Company's research and development expense was $0.4 million, compared to $0.2 million in the same period last year. The increase in R&D expense was mainly due to the Company's continued efforts to take a dominant position in research activities relating to formulation screening, new technology exploration and technical criteria improvement since 2013. We expect this new model will improve our exploration channels for pipeline production.

Our bad debt expenses were $3.3 million in the first quarter in 2014, while our bad debt benefit was $0.1 million in the same period in 2013. The increase in bad debt expenses was mainly due to the increase in the accounts receivable with older age.

Net loss for the first quarter 2014 was $2.4 million compared to net loss of $2.8 million in the same period in 2013. The decrease of the net loss was primarily due to the inventory obsolescence recognized in the first quarter of 2013, and the bad debt expense recognized for the first quarter of 2014. This was partially offset by increase in gross profit due to overall higher margins during the first quarter of 2014.

Turning to the balance sheet, as of March 31, 2014 the company had cash and cash equivalents of $5.3 million compared to $6.0 million as of December 31, 2013. Our accounts receivable balance decreased to $42.3 million at March 31, 2014 from $45.1 million at December 31, 2013. Our receivables decreased due to our enhanced collection efforts as well as the increased allowance for doubtful accounts at March 31, 2014 compared to December 31, 2013.

For the first quarter in 2014, cash flow from operating activities was 2.5 million as compared to $1.1 million in the same period in 2013. Overall, we will continue to focusing on our business development and new GMP project construction and believe that this will support the fair evaluation of our shareholders’ interest in the future. With that, we will now open the call up to the questions, operator?

Question-and-Answer Session

Operator

Sure, sir. (Operator Instructions). Your first question comes from the line of James Fold (ph) from Fold (ph) Corporation. Please ask your question.

Unidentified Analyst

I have a few questions but I am told only two to begin with so I will go back on the line afterwards. My first question is I understand the government is raising prices on certain pharmaceutical products, will that benefit you and are the price raises in products you make?

Zhilin Li

[Foreign Language]

Diana Huang

Ms. Li explained that the policy you referred to should be the policy issued by NDRC which is National Development and Research Commission to raise the prices for certain pharmaceutical products with an very cheap price. And Ms. Li continued that this policy actually does not apply to the overall pharmaceutical products in general.

Unidentified Analyst

Second, did you receive my email last week, I have sent to Sam and Diana an email?

Diana Huang

No actually, I am not aware of any incoming on…

Unidentified Analyst

Could you send me an email when we hang up and I will respond to you later today and I must had a wrong email address?

Diana Huang

Okay or you could resend that to the email address which listed in our news release.

Unidentified Analyst

I will do so later today.

Diana Huang

Thank you.

Unidentified Analyst

Thank you. I will ask some other questions later.

Diana Huang

Great. Thank you.

[Foreign Language]

Operator

(Operator Instructions) Mr. James Fold you can continue.

Unidentified Analyst

Thank you. It appears that you are profitable for the quarter before the accounts receivable write-off, is that correct? And would you assume going forward, if there were no further receivable write-offs you would be profitable as well.

Zhilin Li

[Foreign Language]

Diana Huang

Ms. Li said yes, actually can save in that way and to further expand in this period in the first quarter of 2014 we actually recognized net income but not loss in the actual business operation activity. The significant number you noticed the bad debt expense was mainly due to the increase in the AR the younger age of accounts receivable. And Ms. Li reiterate that we have objective marketing strategy in the recent quarter to enhance the collection of cash to support our new GMP facility investment. And simultaneously control or shrinking the sales on credit. But however those overall strategy in terms of the collection of accounts receivable cannot magically immediately change our overall AR background. So that’s basically how reply.

Unidentified Analyst

Last question your new plant will be open in June and I have visited your old plant which is really a very nice plant, what will you do with the old plant.

Zhilin Li

[Foreign Language]

Diana Huang

Ms. Li respond she reports when you visit our old plant in the past and she points out that actually our new GMP facility is built right in front of the new plant in the Greenyard if you could still remember.

Unidentified Analyst

I do.

Diana Huang

Yes, the new plant is with over 20,000 square meter in size and with this new plant we will expand our capacity of the sterilization production line. And she points out that the hardware of the new facility will even complying with the Europe standard. And then Ms. Li, we expect to submit the application to CFDA in June as you mentioned. And after the submission, we expect another three to six months to get the new GMP certificate. Then she continued, once we gets the new GMP certificate and kick off the operation of the new GMP plant, we will then start upgrade our old plant to the new GMP standard. In that case, our capacity will be greatly expanded especially the sterilization production line will be greatly expanded. And the level will be improved to the international level as well.

Unidentified Analyst

Thank you very much and I wish you good luck.

Diana Huang

Thank you.

Zhilin Li

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. I will hand the call back to Mr. Sam for the final remarks.

Sam Hsing

Thanks. On behalf of the entire China Pharma team we would like to thank you for your interest in the Company and participation on this call. For any of you travelling to China, we always welcome and encourage any visitors from our shareholders, potential investor and analysts. This concludes China Pharma’s first quarter 2014 earnings call. Thanks.

Operator

Ladies and gentlemen, that does conclude the conference for today. Thank you all for participating. You may now disconnect.

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