Diana Huang - IR Manager Zhilin Li - President, CEO and Interim CFO Sam Hsing - Corporate VP

Ladies and gentlemen, thank you for standing-by and welcome to the Second Quarter 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, Friday 15 August, 2014. I would now like to hand the conference over to your host today, Ms. Diana Huang. Thank you ma’am. Please go ahead.

Thank you, Cory. Good morning ladies and gentlemen and good evening to those of you joining us from China. Welcome to China Pharma Holdings’ second 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. 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 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 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 our filings with the Securities and Exchange Commission. In addition, any projections as to the company’s future performance represent management’s estimates as of today, August 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 which will be translated by Sam. Afterwards Sam will continue translating Ms. Li’s detailed discussion of the company’s second quarter 2014 financial results.

Thank you, Diana. [Non English].

Good morning everyone. I would like to thank each of you for joining us today and for your continued support of China Pharma. We are very excited to inform you that we have submitted application for the new GMP certificate at the end of June, 2014. We believe that 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. The national CFDA staff was originally scheduled for on-site review of our new facility and production line, in later July of 2014. The review is mandatory and the major step in order for us to receive the new GMP certification. However due to once-in-forty-year 16 grade super typhoon Rammasun hitting Haikou on July 18, 2014 the on-site-review was postponed and the typhoon caused considerable damage to our manufacturing facilities and inventory. We have taken emergency measures to restore and recover post typhoon to be ready for the rescheduled on-site-review in mid-August. I will now read the rest of miscellaneous prepared remarks in English. Revenues for the second quarter 2014 was $6.1 million, a decrease of 24% from revenue of $8 million for same period in 2013, due to the suspension of our injectable production lines this year. Our cost of revenue was $3.7 million, or 61% of total revenue in the second quarter of 2014, which represented a decrease of $2.1 million from $5.8 million, or 73% of total revenue in the second quarter of 2013. The decrease in cost of revenue was mainly due to a decrease in purchasing price of certain raw materials result from market fluctuation. Gross profit was $2.4 million in the second quarter of 2014, an increase of $0.3 million from $2.2 million in the same period of 2013. Our gross profit margin in the second quarter of 2014 was 39% compared to 27% in the same period of 2013. The increase in gross profit margin was mainly due to the decrease in purchasing price of certain raw materials and the increase in selling prices of certain products result from the market fluctuation. Selling, general and administrative expenses were $1 million, or 16% of sales in the second quarter of 2014, compared to $1.3 million, or 16% of sales, in the same period of 2013. The company's research and development expense was $1.9 million in the second quarter of 2014, compared to $0.9 million in the same period last year. The increase in R&D expense was mainly due to the costs related to testing of the new production lines and to the payment schedule per milestone stated in the contracts. Our bad debt expenses were $8 million in the second quarter of 2014, compared to $4.8 million in the same period in 2013. The increase in bad debt expenses was mainly due to the increase in the aged accounts receivable. Net loss was $8.6 million or $0.20 per basic and diluted share in the second quarter of 2014, compared to $4.5 million, or $0.10 per basic and diluted share in the same period in 2013. The increase in net loss was primarily due to the decrease in sales and the increase in bad debt expense and R&D expense recognized for the three months ended June 30, 2014. Six months results; revenue for the six months ended June 30, 2014 was $13.2 million, down 19% from revenue of $16.3 million for the six months ended June 30, 2013. Gross profit for the six months ended June 30, 2014 was $5.1 million for the six months ended June 30, 2014, compared to $0.6 million for the corresponding period of 2013. Gross profit for the six months ended June 30, 2013 was impacted by the inventory obsolescence amount of $3.7 million during that period. Operating loss was $10.9 million for the six months ended June 30, 2014, decreased by $3.1 million from $7.8 million for the same period of 2013. Net loss was $11 million, or 0.25 per basic and diluted share for the six months ended June 30, 2014, compared to $4.2 million or $0.17 per basic and diluted share for the same period a year ago. Turning to the balance sheet, as of June 30, 2014, the company had cash and cash equivalents of $4.4 million compared to $6 million as of the December 31, 2013. Our accounts receivable balance decreased to $35.9 million in June 30, 2014 from $45.1 million at December 31, 2013. The decrease was due to our enhanced collection efforts as well as the increased allowance for doubtful accounts at June 30, 2014 compared to December 31, 2013. For the three months ended June 30, 2014, cash flow from operating activities was $2.4 million, as compared to $3.1 million in the same period in 2013. Overall we will continue focusing on our business development and getting the new GMP certificate and I believe that this will support the fair evaluation of the shareholders interest in the future. With that we will now open the call up to the question. Operator?

Thank you sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Your first question comes from the line of [Jim Port from Hort Corporation]. Please ask your question.

Thank you. Has everybody survived and is everybody healthy from the hurricane and typhoon?

Yes we are all good. Ms. Li replies, yes we are all good and survived post to the typhoon and we also feel glad to share with you that after almost one month’s hard work of recovery and restore it in -- we are finally in good shape to accept the on-site review of the National CFDA staff.

I see your gross profit margin went up substantially to 39%, do you think you will be able to keep that 39% in the future?

Ms. Li comments that she feels that in general the pricing pressure from the market is still heavy due to the healthcare reform and in this quarter our performance of profit margin was quite good which was mainly due to the market fluctuation and which cannot be considered as a trend, it should be temporary.

And my last question is the bad debt, do you feel you are finished in writing off the bad debts or do you think there may still be more to come?

We would like to clarify one point which is that the bad debt expense you may refer to in this question was mainly due to the increase of the older aging accounts receivables increase. And we still feel comfortable that we could collect those accounts receivables finally. She reinforced that in history we almost do not write off any accounts receivable.

Thank you very much.

Thank you.

Thank you. Your next question comes from the line of [Peter Siris from Shreme]. Please ask your question.

Hi, I would like to follow up on Jim's question. I see that you have that 42% of your receivables are more than a year older, 36% are more than two years old. Could you -- and I know that in the end you've always gotten paid. Why are these hospitals taking so long to pay and what makes you confident that they will end up paying?

Ms. Li said that as you may be aware we have shifted our sales strategy to more prudent spent in the recent two years. And this strategy strengthened the preference of sales of customers who could pay the accounts receivable quicker, while on the other hand reduce the supply to the customers who has very long schedule to pay back their accounts payables. It turns out that this strategy contributed to the recovery of our fund to support our new GMP upgrading and construction of the new facility and also it helped to reduce the balance of our accounts receivable. But as a side effect it negatively impacted our sales and indirectly prolonged the payment from infringed customers, reflected in our accounts receivable aging, the older aging increased dramatically in the recent quarters. With the -- I further point out that in first year -- in the first half of this year the company has not carried out any special program such as discount to push the payment from the customer while may be the management will consider taking a series of targeted measures to promote the collection of older aged AR in the next quarter.

So in the next quarter you may do something to encourage these -- it’s mostly hospitals, correct, the hospitals to pay, is that correct?

Ms. Li said, yes the hospitals as well as distributors.

Okay. I know that your focus right now is on the GMP. So your hope is that you will get your GMP by the end of this year?

Ms. Li said, yes your understanding is correct. Although the on-site review from the FDA was postponed for almost one month from the end of July to mid of August but they will come, they will arrive at our office tomorrow. So we will start this major step tomorrow.

Okay and I know you have a lot of problems with the typhoon and GMP. What -- is anything happening with any of your drugs?

Ms. Li said we had -- our patented products are still carrying on their development but as of now we do not have any special news to share with you.

Okay. And the antibiotic that’s finished, it’s still in Phase 2?

Yeah, you are correct, because the government body improved the criteria and added more clinical trial requirement for this patented product.

And do you any idea when Phase 2 would be finished?

[inaudible], we hope Phase 2 could be finished by the end of this year. But in current condition, it’s something out of our control. So we are not that confident to make this estimation.

Okay, thank you.

[Non English].

(Operator Instructions). There are no further questions at this time. I would now like hand the conference back to today’s presenters. Please continue.

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 visits from our shareholders, potential investor and analysts. This concludes China Pharma’s second quarter 2014 earnings call.

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