China Shenghuo Reports Unaudited Financial Results for the Second Quarter of 2010; Reaches Agreement in Principle to Settle Class Action Lawsuit
Mr. Gui Hua Lan, Chief Executive Officer of China Shenghuo, commented,"Sales for the quarter ended June 30, 2010 was approximately $6.88 million,decreased by 15% from approximately $8.13 million for the quarter ended June30, 2009. Net loss was $37,910 for the quarter ended June 30, 2010, ascompared to net loss of $3,775,818 for the quarter ended June 30, 2009. Thedecrease in sales was primarily due to our adjustment of the sales commissionpolicy to decrease the commission to sales representatives to offset thepressure resulting from the increase of the price of raw material. The Companywill continue to make efforts to promote the sales of our products and controlour costs."
Second Quarter 2010 Results
Sales: Sales for the three months ended June 30, 2010 was approximately$6.88 million, a decrease of approximately $1.25 million, or 15 %, fromapproximately $8.13 million for the three months ended June 30, 2009. Thedecrease was mainly due to the Company adjusted our sales commission policy todecrease the commission to sales representatives, which led to the decrease ofthe sales in the second quarter. The Company in August has increased its salescommission, but not to pre-existing levels, as a result as a slight decreasein its cost of Sanqi.
Since the spring of, 2010, we faced a challenge of insufficient supply ofour major material-Sanqi in Yunnan Province, where has suffered the worstdrought in 50 years from last autumn to this spring. The output of Sanqidecreased sharply, resulting in the price of Sanqi increased remarkably. Inorder to release the pressure from increasing cost, the Company decided toadjust our sales commission policy to decrease the commission to salesrepresentatives by 10% as compared to that in the first quarter, which led tothe decrease of the sales. The commission policy is subject to adjustment fromtime to time according to the sales in the market.
Gross margin: Our gross margin for the three months ended June 30, 2010was approximately $4.4 million as compared with approximately $5.74 millionfor the three months ended June 30, 2009, a decrease of $1.34 million, or 23%.Gross margin as a percentage of revenues was approximately 63.8% for the threemonths ended June, 2010, a decrease of 7.2 % from 71% for the three monthsended June 30, 2009. The decrease in gross margin percentage was primarily dueto the increase of raw material price.
Selling expense: Selling expenses were approximately $2.97 million for thethree months ended June 30, 2010, a decrease of $3.25 million, or 52%, fromapproximately $6.22 million for the three months ended June 30, 2009. Theprimary reasons for the decrease in selling expenses were: i) our adjustmenton the commission policy to sales representatives as set forth above; ii) thestrengthened control on the travel expense, business entertainment expense,etc.
We reimburse the sales representatives their selling and marketingexpenses when they submit the appropriate documentation to be reimbursed andtheir sales are collected. We reimburse the sales representatives theiraccrued selling expenses when related accounts receivable are collected.
General and administrative expense: General and administrative expenseswere approximately $0.91million for the three months ended June 30, 2010, adecrease of $2.21 million, or 71%, from approximately $3.12 million for thethree months ended June 30, 2009. The decrease was primarily due to theCompany has provided significant provision for doubtful accounts in 2009.
Research and development expense: Research and development expense for thethree months ended June 30, 2010 was $175,538, as compared to $6,640 for theperiod ended June 30, 2009, an increase of approximately $168,898. Theincrease was primarily due to the increase in the expenditure on one of ourinnovative medicines- Dencichine Hemostat and the cooperation with outsideexperts in the R&D since late 2009.
Other expenses: Other expenses were $319,849 for the three months endedJune 30, 2010, which consisted of interest expense and non-operating expense,offset by subsidy income, interest income, non-operating income, an increaseof $156,430, or 96%, from $163,419 for the three months ended June 30, 2009.The increase was mainly attributable to the recognition in the consolidatedfinancial statements as of June 30, 2010 of the payment expected to be made inconnection with the settlement of the class action law suit.
Net loss attributable to shareholders: Net loss decreased to $37,910 forthe three months ended June 30, 2010 as compared to net loss of $3,775,818 forthe three months ended June 30, 2009. The decrease in net loss was primarilydue to the decrease of selling expenses and general administrative expenses.
Agreement in Principle to Settle Class Action Lawsuit
In 2008, putative class action lawsuits were asserted against the Companyand certain other parties in the United States District Court for the SouthernDistrict of New York (the "Court"). On February 12, 2009, an amended complaintwas served on the Company and the other defendants consolidating the putativeclass actions and bearing the caption Beni Varghese, Individually and onBehalf of All Other Similarly Situated v. China Shenghuo PharmaceuticalHoldings, Inc., et al., Index No. 1:08 CIV. 7422
On July 21, 2010, in a mediation conducted by Retired Judge Nicolas H.Politan, the Company entered into an agreement in principle with counsel forplaintiffs in this litigation and the Company's former independent registeredpublic accounting firm, Hansen, Barnett & Maxwell, P.C. ("HB&M), in which theparties agreed to settle all claims by the putative class members in exchangefor the payment of $200,000 by the Company and $600,000 by HB&M's professionalliability insurer. The settlement, including its provisions regarding thenotification of class members and administration of any claims, will beentered into in a written stipulation and agreement of settlement, to beexecuted by counsel for the parties, and then must be submitted to the Courtfor approval. The settlement is expected to result in the dismissal of theclass action litigation.
According to Gui Hua Lan, Chief Executive Officer of China Shenghuo, "Weare pleased that this agreement in principle has been reached. While theCompany believes that it has meritorious defenses to the allegations and wouldhave prevailed had the matter been fully litigated, we believe that it is inthe best interests of our stockholders to put this litigation behind us.Clearly, it would have cost the Company significant time and financialresources had the lawsuit continued. By resolving this matter on the termsreached, and assuming the settlement is approved by the Court, the Company andthe investment community can now focus their attention entirely on thebusiness and growth prospects of the Company."
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 iscurrently been listed in the State Insurance Catalogue. At present, ChinaShenghuo incorporates a sales network of agencies and representativesthroughout China, which markets Sanchi-based traditional Chinese medicine tohospitals and drug stores as prescription and OTC drugs primarily for thetreatment of cardiovascular, cerebrovascular and peptic ulcer disease. TheCompany also exports medicinal products to Asian countries such as Indonesia,Singapore, Japan, Malaysia, and Thailand and to European countries such as theUnited Kingdom, Tajikistan, Russia and Kyrgyzstan. 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 proceedings arising out of or related to anyof the matters described in recent press releases, including arising out ofthe restatement of the Company's financial statements; the Company's abilityto refinance or repay loans received; the Company's uncertain businesscondition; the Company's continuing ability to satisfy any requirements whichmay be prescribed by the Exchange for continued listing on the Exchange; risksarising from potential weaknesses or deficiencies in the Company's internalcontrols over financial reporting; the Company's reliance on one supplier forSanchi; the possible effect of adverse publicity on the Company's business,including possible contract cancellation; the Company's ability to develop andmarket new products; the Company's ability to establish and maintain a strongbrand; the Company's continued ability to obtain and maintain all certificates,permits and licenses required to open and operate retail specialty counters tooffer its cosmetic products and conduct business in China; protection of theCompany's intellectual property rights; market acceptance of the Company'sproducts; changes in the laws of the People's Republic of China that affectthe Company's operations; cost to the Company of complying with current andfuture governmental regulations; the impact of any changes in governmentalregulations on the Company's operations; general economic conditions; andother factors detailed from time to time in the Company's filings with theUnited States Securities and Exchange Commission and other regulatoryauthorities. The Company undertakes no obligation to publicly update or reviseany forward-looking statements, whether as a result of new information, futureevents or otherwise.Second Quarter 2010 Financial Highlights -- Total revenues decreased to $6.88 million for the second quarter of 2010, representing 15% year-over-year decrease. -- Gross margin for the second quarter of 2010 decreased to $4.4 million, as compared to $5.74 million for the same period of 2009. -- Net cash provided by operating activities increased to $1.46 million for the six months ended June 30, 2010 from $0.98 million for the same period of 2009. -- Net loss attributable to stockholders decreased to $37,910 for the second quarter of 2010, as compared to net loss of $3,775,818 for the same period of 2009.
SOURCE China Shenghuo Pharmaceutical Holdings, Inc.
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