China Pharma Holdings, Inc. (CPHI) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to China Pharma Holdings Incorporated Third Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advice you that this conference call is being recorded today, Thursday 15th of November, 2018. I would like to hand the conference over to your speaker for today, Ms. Diana Huang. Thank you. Please go ahead, ma’am.

Thank you, operator. Good morning, ladies and gentlemen, and good evening to those of you joining us in China. Welcome to China Pharma Holdings’ third quarter 2018 earnings conference call. I'm 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. 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 for 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 product 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 R&D and sales and marketing activities, and other risks detailed from time-to-time in our filings with the SEC. In addition, any projections as to the company's future performance represent management's estimates as of today, November 15, 2018. China Pharma assumes no obligation to update those projections in the future as market conditions may 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, which will be translated by Sam. Afterwards, Sam will continue translating Ms. Li’s detailed discussion of the company's third quarter 2018 financial results. [Foreign Language]

Thank you, Diana, and good morning everyone. I would like to thank each of you for joining us today and for your continued support of China Pharma. It is the company’s top priority to actively and steadily increase sales. We experienced certain market fluctuations in the third quarter of 2018, but through the continued implementation of the sales promotions, our sales revenue in the first nine months of 2018 was comparable to the same period a year ago. Management will continue to vigorously promote sales by actively participating in the recent provincial markets openings to receive the new drug tender offers and the software penetration in the market. We announced – we just launched the health product Noni Enzyme with the brand name of ARARATO. It represents strategy developments for our company to expand into the health product market. We believe that with the aging of the Chinese population, the growth of the middle class population, and the strengthening of national health awareness, we are in a good position to explore health products, along with our core business of pharmaceutical products to leverage use of our facilities and sales channels to meeting market needs. I will now read the rest of Ms. Li’s prepared remarks in English. Now I would like to review our third quarter 2018 financial results and the balance sheet information. Revenue was $2.3 million for the three months ended September 30, 2018, compared to $3.2 million for the three months ended September 30, 2017. This decrease was mainly due to market volatility. Gross profit was $0.5 million and $0.4 million for each of the three months ended September 30, 2018 and 2017 respectively. Our gross profit margin in the third quarter of 2018 was 22.3% compared to 13.3% in the same period of 2017. Our selling expenses for the three months ended September 30, 2018 were $0.9 million, which accounted for 40.3% of the total revenue in the third quarter of 2018. For the same period in 2017 our selling expenses were $0.7 million which accounted for 21.7% of the total revenue in the third quarter of 2017. When comparing selling expenses to 2018 to lost in 2017, the increase in the percentage of the selling expenses to total revenue was mainly due to the decrease in revenue in this quarter. Along with many adjustments in our selling processes under healthcare reform policies. Despite the decrease in sales, we still need to maintain personnel and continue our sales activities to support the sales and collection of accounts receivable. Our general and administrative expenses for the three months ended September 30, 2018 and September 30, 2017, were both $0.3 million. General and administrative expenses accounted for 14.2% and 11% of our total revenues in the third quarter of 2018 and 2017, respectively. Net loss for three months ended September 30, 2018 was $1.9 million, compared to $2.2 million for the three months ended September 30, 2017. The change in the net result was mainly due to the decrease in revenue, and the increase in selling expenses being offset by a decrease in impairment of long-term assets in the third quarter of 2018, as compared to the same period of 2017. Revenues decreased by 3% to $9.1 million for the nine months ended September 30, 2018, as compared to $9.4 million for the nine months ended September 30, 2017. Gross profit for the nine months ended September 30, 2018 was $2.1 million, compared to $1.8 million in the same period of 2017. Gross profit margins for the nine months ended September 30, 2018 and 2017 were 24% and 19%, respectively. The increase was mainly due to the increase in sales of higher margins for product in the nine months ended September 30, 2018. Our net losses for the nine months ended September 30, 2018 and 2017 were $3.2 million and $5.5 million, respectively, which represented an improvement of $2.3 million for the period in 2018. Turning to the balance sheet, as of September 30, 2018 the company had cash and cash equivalents of $0.7 million compared to $2 million as of December 31, 2017. Our accounts receivable balance was $0.8 million as of September 30, 2018 compared to $2.3 million as of $2.3 million as of December 31, 2017. Overall, we will continue focusing on our business development and promote our sales 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 questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] You have one from Peter. Please ask the question.

Yes. How are you everybody? I have two questions. The first question I have is how many years you saw million of dollars products through hospitals and gotten paid. So you won’t have all those receivables. I’m just curious these are all government hospitals, how do they justify not paying you the money they owe for drugs they brought?

[Foreign Language] We believe that actually we have advantage of our sales strategy increase in the year. And since this adjustment we have achieved slight demanding products, in terms of the control of the count of account receivables. And however, while the side effect of our historical performance of promoting on sales and the growth of accounts receivables, was less those AR grew to a very long HAR and then gradually they became bad debt. Therefore since we changed the sales strategy no longer sales debt. Then this change negatively impacted our sales performance in recent year. And also we noted this adjustment also negatively impacted the collection effort for the accounts receivable from the customer with very [indiscernible] AR. Thank you.

I understand that. What I don’t – what I never understood is how customers who had the money would never agree to pay you that just isn’t fair to me that they bought new product and didn’t pay you. I think that’s really not fair but that’s just my comment.

[Foreign Language] This is actually – she shared the same comment with you. However, this is what the macroenvironment of the Chinese pharmaceutical margins in China. So we believe somewhat it is the environment is out of our control.

No, no. I agree. I’d just like to ask one more question, you have this – you launches new product, the Noni Enzyme. You have very good factory capacity. Are we going to see a number of other types of health products introduced in the future? And what’s the channel you’re going to use to sell them. Will they be hospital’s drug stores or something else?

[Foreign Language] Please research, the company will take the development of health and products as our strategy to develop more health product in the future. She thinks this is mainly because the period, the registration for the health product in China through CFDA is much a factor compared to the products for medicine. And to answer your second question, the sales channel is the answer because this Noni Enzyme is a consumer product it’s no longer a medicine for the indication of certain – for the patients. Therefore we plan to sell as through the so called new retailing model of system in China. In addition, we also plan to sell it through Internet. Thank you.

[Foreign Language] Ms. Li continues; this sales model is due retaining system, flat, internet sales. It is without account receivable. Thank you.

Thank you very much, Zhilin Li.

Thank you.

[Operator Instructions] There are no questions at this time. Please continue.

On behalf of the entire China Pharma team, we would like to thank you for your interest in the company, and your participation on this call. For any of you travelling to China, we always welcome and encourage any visitors, from our shareholders, potential investors, and analysts. This concludes China Pharma’s third quarter 2018 earnings call.

Thank you. Ladies and gentlemen, that does conclude our conference for today. And thank you for participating. You may all disconnect.