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As previously discussed, an independent internal investigation found thattwo of the Company's financial department personnel improperly accounted forthe collection of certain trade receivables and employee advances. As aresult of these accounting errors, the Company determined that it hadunderstated its bad debt allowance, which resulted in the understatement ofgeneral and administrative expenses and the overstatement of net income andearnings per share for the full year 2007 and first quarter 2008.
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The Audit Committee found no evidence to suggest that these accountingerrors were made at the direction of, or with the knowledge or involvement of,the Company's executive officers and management. The two employees found tobe responsible for the accounting errors have been dismissed by the Company.The Company also recently announced the appointment of Wendy Fu, a US licensedCPA, as the Company's new Chief Financial Officer. Ms. Fu has replaced Ms.Gao, the Company's former Chief Financial Officer, who now heads the Company'sinternal control group.
Mr. Gui Hua Lan, Chief Executive Officer of China Shenghuo, said, "As aresult of the errors that have come to light, we are implementing significantremedial measures and other actions to address our weaknesses in internalcontrol. The appointment of our new CFO and the new independent director Dr.Jason Zhang, who is also on our Audit Committee, is to bring their expertisein accounting, auditing, corporate governance and reporting to help restoreshareholders' confidence. These steps should result in substantialimprovement in our financial reporting process."
Restatement Impact on Full-Year 2007 and First Quarter 2008
More detail regarding these amounts and the restatements can be obtainedfrom the Company's amended Annual Report on Form 10-KSB/A for the year endedDecember 31, 2007, and its amended Quarterly Report on Form 10-Q/A for thefirst quarter ended March 31, 2008, which were filed with the U.S. Securitiesand Exchange Commission on Friday November 14, 2008.
Second Quarter 2008 Financial Highlights
Revenues for the second quarter of 2008 were $8.59 million, up 35% year-over-year compared with $6.36 million reported in the second quarter of 2007.The increase in sales was driven mainly by the increase in sales of theCompany's main product, Xuesaitong Soft Capsules, as well as the Company'snon-prescription ("OTC") pharmaceutical products.
Gross profit for the three months ended June 30, 2008 was $5.60 millioncompared with $4.77 million in the same period last year. Gross margin was65.2%, a decline from 75.1% in the second quarter of 2007. The decrease ingross margin percentage was primarily due to the sales of other branded OTCproducts, which carry lower profit margins. Sales of these products wereterminated at the end of the second quarter.
Net loss for the second quarter of 2008 was $1.54 million compared withnet income of $1.32 million for the same period last year. Second quarter2008 loss per diluted share was $0.08 compared to earnings per diluted shareof $0.07 for the same period last year.
Third Quarter 2008 Financial Results
Revenues for the third quarter ended September 30, 2008 were $7.28 million,representing an increase of 73% compared to $4.20 million for the thirdquarter of 2007. The increase in sales was driven mainly by increased salesof the Company's main product, Xuesaitong Soft Capsules, augmented byincreased sales of the OTC products, cosmetic products and increased export ofproducts.
Third quarter 2008 gross profit was $5.31 million, an increase of 68% over$3.16 million for the same period in 2007. Gross margin for the third quarterof 2008 was 72.9%, compared with 75.3% for the third quarter of 2007. Thedecrease in gross margin percentage was driven largely by the increase in thecost of the raw material used in the Company's primary product.
Sales and marketing expenses for the third quarter of 2008 increased 93%to $2.99 million over $1.55 million in the third quarter of 2007, primarilydue to the increase in commission paid to sales representatives due toincreased sales of the Company's primary product and the increase in marketingexpenses for the Company's cosmetic products. General and administrativeexpenses for the third quarter of 2008 increased to $1.82 million compared to$341,372 for the same quarter in 2007, primarily due to the increase inexpenses related to the Company's status as a public company with itssecurities traded on a U.S. national exchange (including accounting and legalexpenses in connection with the restatement), and the increase in expensesrelated to business expansion of cosmetic products.
Third quarter 2008 operating income decreased to $432,408 compared to$1.27 million for the third quarter of 2007.
Third quarter 2008 net income decreased to $154,286, or $0.01 earnings perdiluted share. This compares to net income of $867,641 or $0.04 earnings perdiluted share for the same quarter in 2007.
Nine-Month Results
Revenues for the first nine months of 2008 increased 43% to $21.35 millioncompared to $14.88 million for the first nine months of 2007. The increasewas primarily due to increased sales of the Company's main product, XuesaitongSoft Capsules, OTC products and cosmetic products, and the increased export ofproducts.
Gross profit for the first nine months of 2008 increased 29% to $14.30million over $11.12 million for the same period in 2007. Gross margin for thefirst nine months of 2008 was 66.9%, compared with 74.7% for the first ninemonths of 2007. The decrease in gross margin percentage was primarily due tothe fact that, in the first and second quarter of 2008, there were sales ofother brand's products which have a higher purchasing price and thus generatea smaller profit margin.
Sales and marketing expenses rose 67% to $8.67 million in the first ninemonths of 2008 over $5.18 million in the same period of 2007, primarily due tothe increase in marketing and advertising of the Company's cosmetic productsand the increase in commission paid to sales representatives. General andadministrative expenses increased to $7.00 million in the first nine months of2008 compared to $2.70 million for the same period in 2007, primarily due tothe increase of the expenses related to the Company's status as a publiccompany with its securities traded on a U.S. national exchange (includingaccounting and legal expenses in connection with the restatement), expensesrelating to business expansion, and the allowance for doubtful accounts due tothe increase of trade receivables aging over one to two years.
Operating loss for the first nine months of 2008 was $1.63 millioncompared with operating income of $3.23 million for the same period of 2007.
Net loss the first nine months of 2008 was $2.24 million, or $0.11 lossper diluted share. This compares to a net income of $3.66 million, or $0.19earnings per diluted share for the same period of 2007.
As of September 30, 2008, the Company's total cash and cash equivalentsamounted to $1.08 million as compared with $2.80 million as of December 31,2007. Total shareholders' equity amounted to $9.82 million as of September 30,2008 compared with total shareholders' equity of $11.31 million as of December31, 2007.
Following the completion of its independent internal investigation andfinancial restatement for the full year 2007 and the first quarter of 2008, aswell as the filings of its quarterly reports for the second and third quartersof 2008, the Company will await confirmation from the NYSE Alternext US LLC(formerly the American Stock Exchange) (the "Exchange") that it has regainedcompliance with the Exchange's listing standards. The company will requestthat the Exchange permit its common stock to resume trading under the tickersymbol "KUN," shortly.
"We are very pleased to have the investigation and restatement behind usand are glad that our shares are expected to resume trading on the NYSEAlternext US LLC," said Mr. Gui Hua Lan, Chief Executive Officer of ChinaShenghuo. "I want to reiterate that after this rigorous process, I am veryconfident in the integrity of our results."
"As for our financial performance, our results for the first nine monthsof 2008 demonstrated measurable sales improvements, said Mr. Feng Lan,President of China Shenghuo. "We continue to focus our efforts on expandingour share in the vast Chinese cardiovascular and cerebrovascular market. Ourflagship product, Xuesaitong Soft Capsules, continued to perform well, and our12 Ways cosmetics products are gradually gaining national recognition. Webelieve that the Company's fundamentals remain strong and our products arewell regarded in China."
Conference Call Information
The Company will host a conference call, to be simultaneously webcast, onTuesday, November 25, 2008 at 10:00 a.m. Eastern Standard Time / 11:00 p.m.Beijing Time. Interested parties may participate in the conference call bydialing +1-877-407-9205 (North America) or +1-201-689-8054 (International)approximately five to ten minutes before the call start time. A live webcastof the conference call will be available on the following website:http://www.investorcalendar.com/IC/CEPage.asp?ID=137977
A replay of the conference call will be available until December 9, 2008at 11:59 p.m. Interested parties may access the replay by dialing +1-877-660-6853 (North America) or + 1-201-612-7415 (International) and entering accountnumber 286 and conference ID number 304436. An archived webcast of theconference call will be available at the website listed above until February22, 2009.
About China Shenghuo
Founded in 1995, China Shenghuo is a specialty pharmaceutical company thatfocuses on the research, development, manufacture and marketing of Sanchi-based medicinal and pharmaceutical, nutritional supplement and cosmeticproducts. Through its subsidiary, Kunming Shenghuo Pharmaceutical (Group) Co.,Ltd., it owns thirty SFDA (State Food and Drug Administration) approvedmedicines, including the flagship product Xuesaitong Soft Capsules, which hasalready been listed in the Insurance Catalogue. At present, China Shenghuoincorporates a sales network of agencies and representatives throughout China,which markets Sanchi-based traditional Chinese medicine to hospitals and drugstores as prescription and OTC drugs primarily for the treatment ofcardiovascular, cerebrovascular and peptic ulcer disease. The Company alsoexports medicinal products to Asian countries such as Indonesia, Russia andKyrgyzstan. For more information, please visit http://www.shenghuo.com.cn .
Safe Harbor Statement
This press release may contain certain "forward-looking statements," asdefined in the United States Private Securities Litigation Reform Act of 1995,that involve a number of risks and uncertainties. There can be no assurancethat such statements will prove to be accurate, and the actual results andfuture events could differ materially from management's current expectations.Such factors include, but are not limited to, risks of litigation andgovernmental or other regulatory inquiry or proceedings arising out of orrelated to any of the matters described in recent press releases, includingarising out of the restatement of the Company's financial statements; theCompany's continuing ability to satisfy any requirements which may beprescribed by the Exchange for continued listing on the Exchange; potentialadverse effects to the Company's financial condition, results of operations orprospects as a result of possible changes to or restatements of prior periodfinancial statements; risks arising from potential weaknesses or deficienciesin the Company's internal control over financial reporting; the Company'sreliance on one supplier for Sanchi; the possible effect of adverse publicityon the Company's business, including possible contract cancellation; theCompany's ability to develop and market new products; the Company's ability toestablish and maintain a strong brand; the Company's continued ability toobtain and maintain all certificates, permits and licenses required to openand operate retail specialty counters to offer its cosmetic products andconduct business in China; protection of the Company's intellectual propertyrights; market acceptance of the Company's products; changes in the laws ofthe People's Republic of China that affect the Company's operations; cost tothe Company of complying with current and future governmental regulations; theimpact of any changes in governmental regulations on the Company's operations;general economic conditions; and other factors detailed from time to time inthe Company's filings with the United States Securities and ExchangeCommission and other regulatory authorities. The Company undertakes noobligation to publicly update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.The summarized restated results for 2007 and first quarter 2008 are asfollows: Full Year 2007 As Previously Reported As Restated Net Income (Loss) $4,016,640 $1,720,387 Net Income (Loss) Per Diluted Share 0.21 0.09 First Quarter 2008 As Previously Reported As Restated Net Income (Loss) ($338,341) ($852,660) Net Income (Loss) Per Diluted Share (0.02) (0.04)
SOURCE China Shenghuo Pharmaceutical Holdings, Inc.
